Circle CEO Jeremy Allaire said he saw the UST meltdown coming about six months ago, long before the stablecoin crash rocked the crypto world.
“This was a house of cards,” he told Protocol. “It was very clear that it was unsustainable and that there would be a very high risk of a death spiral.”
On Wednesday, the UST stablecoin, which is supposed to maintain a one-to-one peg to the U.S. dollar, had flatlined at roughly a penny, while its sister cryptocurrency, the luna, saw its total market value plunge to about $1 billion, down from more than $36 billion at its peak.
Allaire said what really caught him by surprise was “how fast the death spiral happened and how violent of a value destruction it was.”
In an interview with Protocol, Allaire talked about what the UST crash means for crypto, the future of stablecoins and his views of SEC Chair Gary Gensler’s leadership.
This interview has been edited for clarity and brevity.
What surprised you most in the UST and luna meltdown?
Our own internal analysis roughly six months ago was that this was a house of cards. It was very clear that it was unsustainable and that there would be a very high risk of a death spiral.
There were two things that surprised me. One was just simply how fast the death spiral happened and how violent of a value destruction it was. I was just speechless, just literally had never seen something evaporate that much in 72 hours.
The more surprising thing to me, what really came home to me when the total collapse occurred, was how many highly intelligent people, how many very savvy crypto leaders, investors, smart money, analysts, media, journalists, academics bought the hype. How many people went along with it, even though it was very clear in a basic, factual, data-driven manner that this was very high risk, and not sustainable.
It was just very clear and somehow there was a kind of collective hallucination. It's just surprising how many people were kind of wanting to believe the hype and meme this into existence.
That, to me, is one of the really most important things to reflect on here, which is that a lot of people have got to look in the mirror and ask themselves: What was it that led them to support such a thing and destroy so many people's lives?
There were reports of people who lost a lot of money and some even contemplated suicide. How did you react to those reports?
The fact that there's people who've had financial ruin is not a surprise at all. If you evaporate $50 billion or whatever it was in less than seven days, that's highly likely.
During that day, one of my colleagues was in a Reddit subreddit. After watching people talk about how they had nothing left to live for and so on and I was hearing that — it was really upsetting.
It just comes back to the point I was making, which is I do not think it's sincere or high integrity for leaders to just say, “Well, everyone knew the risks.” Because there were promoters and I think fairly intelligent people who indulged in this. Frankly, I'm very disappointed in a lot of people.
You’re a leader in the industry. Did you try to talk about this with Do Kwon or any of the folks from that ecosystem, to maybe warn them or gain insight into what they're trying to do?
Everything's out in the open, in public. People were certainly raising questions; I think the interesting thing was Do Kwon, who's a so-called leader, was just attacking people ad hominem. I think there's a culture of fear of not wanting to be attacked, publicly, or humiliated by Do Kwon. And that's shameful.
That's not leadership. That's cowardice and insecurity. So I think that's also something for people to reflect on. In podcast interviews I would be asked about the topic, I would sort of outline what I think is problematic. But I'm one small voice. [Protocol reached out to Do Kwon through his Luna Foundation Guard nonprofit, but did not immediately get a response.]
You’re head of the second-biggest stablecoin, and stablecoins have taken a hit in terms of reputation. Are there things that you're trying to do now with other industry leaders in terms of making changes in the industry or proposals for regulations?
We're doing a lot of what we've always done, which is try and build the most trusted, most transparent, most compliant model possible for this. There's a reason why there's been a flight to quality. There's a reason why over the past week, USDC has seen strengthening, material strengthening. And you've seen other perceived higher-risk assets shedding enormous amounts of their assets.
I'm communicating a lot with other leaders, people who run important pieces of the ecosystem, to ask them what they're thinking. Has this changed how they think about risk? There is really, I think, a change taking place.
We've also spent a fair amount of time with policymakers who are trying to understand this and want to get things right, because stablecoin regulation has been on the table for a year.
The Treasury Department and the White House issued a report less than nine months ago, making it clear that stablecoins had risks of runs, that it was an urgent issue for Congress to deal with. And we agreed with that report.
After that, Congress started working on it. So we started working closely with Republicans, with Democrats in the House and the Senate. There's been a huge amount of work. So in the weeks even prior to this, we have really good draft legislation that's in front of committees. You've got bipartisan engagement on this.
If anything, we're doubling down on that. It's an opportunity for the United States to not only address some of the risks, but frankly, provide the kind of assurances that market participants need so they can build on this.
Ultimately, the promise of this is that it's a new dollar-market infrastructure that's built on the internet that households and firms and financial institutions can depend on and build on. All together, it just brought more light into how you do things right, versus how to do these kinds of crazy things.
An analyst told me that stablecoins should be boring, that stablecoin companies should be like the Federal Reserve. They should be making cryptocurrencies that [are] clearly pegged to the U.S. dollar, not offering tokens that offer attractive yields. That was a key point highlighted in the UST stablecoin controversy. People were stunned that users were promised 20% yield for depositing UST in Anchor Protocol.
Yeah, USDC is boring. USDC is a store of value, an electronic money instrument. One can merely create or redeem these through Circle. They can go through our partners like Coinbase or FTX, or others, and it doesn't do anything else. It's held in cash and short-term government bonds. It's extremely safe. It’s regulated. It’s audited. It's all these things, right. So it's boring. It does what it needs to do which is provide a reliable dollar digital currency that runs on the internet.
But you also have products that offer interest.
That's separate. USDC itself, as a digital currency instrument, is boring, to use your phrase. There are borrowing markets for USDC. So those are interest rate markets. You can interact with those interest rate markets through decentralized protocols. You can interact with those interest rate markets through centralized services.
There's an interest rate people are paying to borrow and there's collateral against that as well.
We do offer that as an investment contract. It's only for accredited investors. It is offered as a security. We've designed this for sophisticated investors that understand [the risks]. There's a regulator that oversees it. There's a regulator that looks over the risk management, the operational controls, the custody, everything. So that is a regulated lending product.
That is radically different from something like Anchor Protocol where basically, it was just free money that was essentially paid for using luna tokens. I mean, it was a subsidy. So someone's basically saying, “Hey, give us your UST and we're going to subsidize you.” There's no one actually borrowing. On the other side of that, there were people pouring in stablecoins — no one actually wanted to borrow them. So they're just paying this yield and they're doing that out of the luna token. Terra is taking its own luna token and effectively using it to pay people a yield. That's like a Ponzi, like a subsidized free interest rate. There's no such thing. It's gonna burn out. That's where you can see the ticking time bomb.
What do you think will happen to the Terra ecosystem that backed UST and luna?
I mean, it completely just destroyed itself. I don't know. I don't even want to guess. I don't really care.
You mentioned that there's been more discussions about potential regulation. Has this crisis led you to any kind of new insight which made you think, “Okay, we shouldn't have done that,” or, “We shouldn't be doing this”?
I think one thing the regulatory discussions around stablecoin rules have focused on [is] defining what it is to be a dollar stablecoin issuer at a national level with an asset-backed stablecoin for running a payment system. That's been the focus, and I think that's been good.
What is now emerging is a recognition that what was being contemplated does not actually address the risk of these so-called algorithmic stablecoins. I think in some ways, what may be needed is statutory definitions. What is a dollar-backed stablecoin? How should it be treated under payments and banking law? What are the specific requirements for it, who's going to supervise it, right? At the same time, what are these other things?
Do you think this is the end of algorithmic stablecoins?
I don't think so. This is a category that I think for a variety of reasons kind of represents the holy grail. It’s like the fountain of youth or whatnot. There will be people who will continue to try and pursue this. It may be harder to pursue it now that it’s blown up on a global scale. But I don't think that we're done seeing efforts to produce these.
Why is it considered the holy grail?
Because for many people, cryptocurrency is a mechanism for storing value, moving value, that is decentralized. Bitcoin is clearly an example of a decentralized form of money that has global reach. [But] it’s difficult to denominate an everyday transaction in bitcoin. So the concept of having a stable-value digital currency, which is also decentralized, which is also not dependent on a centralized issuer, a government-regulated issuer, but that can hold $1 of value or whatever the reference asset is, is obvious.
People are talking about CPI indexed stablecoins, or things like that — that can hold the value but it's censorship-resistant and can exist without needing a centralized issuer or government regulatory intervention. That's what people are looking to accomplish.
Is that something Circle is studying or looking to move to eventually?
Not really. From a long-term perspective, I think the idea of synthetic global digital currencies is compelling, but that could be 20 years from now.
When we decided to build USDC five years ago, we really believed that the right place to start is with this hybrid digital currency model, where you take existing central bank liabilities, or government liabilities, like Treasury bonds or cash from the Fed or what have you, and tokenize it, create a digital currency form factor that can run on the public internet but that had the assurance and the interoperability with that existing financial system. That was the right place to start. That would be how mass society would adopt this first.
Last time we talked, you stressed the role of the private sector in the continued growth of blockchain, crypto and stablecoins. Now there's growing fear of an unregulated, unmonitored industry.
This is an amazing industry. I think it's one of the most dynamic industries in the world right now. I mean, if you just look at the sheer number of developers, creators, innovators, startups in Web3. It's staggering and it's growing at a really fast rate, and covering so many different applications and use cases and industries.
I'm more bullish than I've ever been on this space right now. I think the infrastructure is getting to a place where we can do internet-scale applications. The utility of this technology is expanding rapidly.
There is a very legitimate risk that regulators actually move too fast to try and define things because I actually think there's just still so much room for development and innovation right now.
SEC Chair Gary Gensler just testified before a House subcommittee, warning about heightened risks in the crypto market given what just happened. He’s been harshly criticized by the industry. What do you think of the way he has run the SEC?
I think Chair Gensler has certainly been consistent in what he says. There are obviously examples of people committing fraud or illegal conduct. They do continue to bring enforcement cases on those. And they're certainly bringing cases around areas where they feel the industry needs better definitions. For example, these yield products and lending products. They've brought some cases and they've sort of defined, “Here's what this is,” and that's caused this industry shift as a result.
I think there's other areas where there's a lot still up for debate. While he may have a very firm opinion about whether all tokens are securities or all crypto exchanges should be national stock exchanges or equivalent, there's a lot of disagreement about that right now. That's actively being debated and discussed in the House Financial Services Committee, in the House Agriculture Committee.
I don’t think one can just take for granted that because Chair Gensler believes something it is in fact what it is.
He’s been portrayed as an enemy of crypto.
I certainly don't think Chair Gensler is an enemy of crypto. I co-taught with him in a class at MIT. I've known him for some time. He's a very intelligent person. There's a lot of detail about this space and technology and so on and he can't necessarily himself understand all of it. So people are sort of saying, “Hey, you don't get this,” or, “You don't get that.” He's chair of the SEC. It's not his job to be the technical expert on everything.
You know, I feel like it's a two-way street. People have to lean in on both sides of things.