The Trust Battle: Stablecoins, Crypto and the Future of Money (with Ali Abou Daya and Morva Rohani)

We have a very conservative culture in Canada when it comes to banking. We don't like change. Our banking sector, they're not interested too much in innovation.

If we think that we've built the walls around ourselves in our banking sector by not enabling these stablecoin technologies or digital asset technologies, what's happening is all over the world, they're tokenizing against the US dollar. And what we will find with us being late to the game, nobody's tokenizing against the Canadian dollar.

Hey, Vass.

Hey, Paul.

Do you use cash much these days for anything?

You know what? Not really. My wallet's basically like an old parking receipt, a loyalty card for a frozen yogurt place that might've closed down in 2018. And my phone, I'm often using my phone to pay for things. I'm lazy.

Yeah, I know the feeling. So it feels like we're already totally digital, but things are about to go to the next level. Sending money from one corner of the world to the other instantly at almost no cost, enter stablecoins into the picture. These are crypto transactions pegged usually to the US dollars. Regulations look to be turning things upside down and it's happening so fast it's hard to keep up.

Yeah. And that conversation is just all about what money actually is and who gets to issue it. For centuries, the power to create money was more isolated in the hands of governments and central banks. But now, stablecoins are really starting to pull at that monopoly and challenge it in interesting ways.

Right. And a lot of this stuff's going on behind the scenes. You can imagine payment systems pretty soon behind your debit card or credit card. Your online shopping could be run from some kind of blockchain technology like stablecoins or other forms of crypto, and we wouldn't even really see anything different.

Absolutely. So today it might feel somewhat niche or foreign to a lot of people, but tomorrow or already, it might be how you're sending money across borders or paying for something, as you said.

And stablecoins of course, and we'll get into what those are, are not just tech. It's actually a geopolitical tool that's playing out quite a bit right now. The US has been very clear saying this is going to deliver the US dollar as the global reserve currency forever. The EU has already passed some legislation around this. China has set up Hong Kong to be a bit of an experiment of how they could do stablecoins, which seems surprising to some, but they're moving fast there and whoever gets there first is kind of setting standards and capturing network effects and everything. It's going to be a big deal.

Absolutely. I mean, it's currency policy, foreign policy and tech policy all in one place. And this is kind of the rare topic that lives right at that intersection, which is why I'm so glad we are talking about it today.

So today we have two excellent guests to talk to us exactly about these issues on the emerging and transformative nature of crypto and stablecoins.

We are joined by Ali Abou Daya, the Chief Executive Officer of Transactix, which is a stablecoin company. And Morva Rohani, she's the Executive Director of the Canadian Web3 Council, which is a council founded by industry leaders to advocate for responsible public policy. Ali and Morva, welcome to Policy Prompt.

Thank you for having us.

Yeah, thank you so much for having us.

Good to see you both. So for listeners that are new to this space, let's get into this question of what are digital assets? What are cryptocurrencies? How would you two start by describing just what digital assets are? What's the starting point for people on this topic?

Digital assets are digitally represented units of value on distributed ledgers, which we call blockchains. They can represent money and this is where stablecoins come in, securities, commodities or other rights. The innovation really is about that distributed ledger piece, because that drives a lot of efficiency, allows us to have access to assets on a 24/7 basis at very low cost. A lot of folks don't know this, but are the current technology that's backing our banking system right now is over 50 years old, backed by very antiquated technology. And so, this is why this particular technology is such a huge innovation on how we transact, how we trade, how we hold and buy sell securities. And so that's sort of at the core of what digital assets are.

Is that tech COBOL, C-O-B-O-L is the short form?

It surprises me that you're aware of this effectively, software programmers for banking are the paleontologists of software technology.

That's correct, yes.

Yeah. And I mean, I will add just to more of us a bit on digital assets. The concept of ledger, because this will be used a lot as well, a digital ledger, this is the core difference or the core innovation from digital assets versus traditional financial assets. The whole idea boils down to what gives money value. There's a consensus that this specific organization, which is a reserve or a bank, when they issue these papers, these papers have X amount of value. And we trust these organizations because they've built the trust over ages. With the concept of a distributed ledger, the ledger, which is the book that writes what paper or what asset has value that sits within the organization, sits in front of everybody. It's technologically through software, through code that's accessible to everybody. So all of us see the same truth and that's why it's a distributed ledger. It's a ledger that sits on the internet.

It really matters on the back of US bills, at least some of them, I think, it says In God We Trust, which is you trust that somebody's backing that dollar. The distributed ledger technology, there have been double books keeping right in accountancy and that was a major innovation, but now what you're describing could have hundreds or thousands of copies, which allows a different kind of verification system in a way, in potentially a more robust verification system I think you're alluding to as well.

Do either of you have a memory of where or when you were first exposed to the concept of a digital asset?

I can speak to the first time I came across Bitcoin. I had just moved to Toronto for school and I think I went to a coffee shop maybe it was Snakes & Lattes, I don't remember. And they had a Bitcoin ATM and I remember having some cash with me and thinking I could buy whatever this is, or I could buy a sandwich. I wrongfully chose the sandwich and then I just didn't really think about it for a few years until the next Bitcoin rush a few years ago. And I thought back to that memory and I was like, "Wow, these are the decisions I make in life." But that sort of speaks to how the early stages of the narrative, at least if you will, on this space versus where it is now. I think before, the conversation was really around retail speculation of investments and some conversations post 2008 financial crisis around inflation or Bitcoin as a hedge against inflation or similar crises.

But I would say now that that conversation has shifted massively compared to what I remember back then and it's now shifted to talking about infrastructure. Blockchain rails for payment, settlement, identity. And so that, I would say, that's the really exciting part for me is because seeing the evolution of the conversation beyond speculative assets towards utility, and I would say the conversation around utility is way more recent versus what my friend told me about Bitcoin when I was in that coffee shop over 10 years ago.

Ali, do you have a core memory? A spark?

Yeah. And a bit of a heartache that comes with it. My engineering classmate pinged me once I was at my work desk and said, "Have you heard of this?" And of course I had not at the time. And he said, "You can mine it on your laptop." It was really early days where you can actually still mine Bitcoin on a laptop. And he wrote this silly script that I started using, and he wanted to buy more because the mining was slow, and I did a lot of cryptography in my younger years and he wanted help encrypting some communications. So I helped. And then in return I got the script that helps you mine Bitcoin on your laptop and then yeah. It was worth under $1 at the time. I clearly remember 1.1, something around that. So I let go of a few dollars back then when I left my laptop with my employer. I wish I did not leave it.

Fair enough, fair enough. And Paul, just before we move on, do you have a core memory of initial exposure?

Yeah. I mean, I was at that time working on international finance a little bit right around the time of the international financial crisis, which is around 15 years ago now. Part of the backlash to that was we can't let it happen again. A little bit of a libertarian movement of we don't want central banks to control our destiny on the value of the currencies we're using. We need something that's outside of that system that's not going to face these crashes. And so, Satoshi wrote that paper, I think it's 2009, that was right after that period. And there was kind of a bit of a cult movement around it of people that were mostly drawn by the technology aspect of it, but also saw this vision of something that was interesting and it's changed so much in those 15 years or so, that it's kind of unrecognizable. But it's not that long ago either that took place, but it was driven a little bit by distrust in the system, and that part remains in different ways now, for sure.

So what do you think the big picture is here? We now have a technology blockchain that's unlocking borderless money for no cost, sort of seems like a no-brainer. Why do you think governments aren't moving faster to enable it? What could be holding it back?

I would say if we're specifically talking about Canada, I would say the reasons are probably more practical. And they range from, and maybe folks wouldn't like this answer, but I just think that they haven't gotten around to it, because they're waiting to see what other jurisdictions do, because they don't know how to approach the sector, and the past few years in Canada have been so politically busy and messy. On my impression in my interactions with government is that it just wasn't a priority.

So what ended up happening, at least the stablecoin front specifically is that one of our regulators, or I guess several of them because their provincial put their hand up and stepped up, because the federal framework wasn't a priority. And now that's where we're at today in terms of why we're dealing with stablecoins, which is effectively payment with a capital markets framework. So that's one aspect of it is that I don't think policymakers expected, I believe it was mentioned earlier, the geopolitical aspects of this. And I don't think they expected that. I don't think that they thought it would be relevant.

And I can attest to this because nearly all my conversations with government over the past three and a half years about this issue was, "Well, we don't really think this is going to be significant. We don't really think this is going to be important. Show us the data that this is important." And it always became this chicken and egg question around talking about something that wasn't really systemically significant yet in the Canadian market, but they wanted it to be systemically significant before they regulated it.

But now we have this big geopolitical risk in front of us and we have to move quickly. And it wasn't sufficient that the European Union had moved on this already. Many APAC markets had already moved on this. They wanted to see US movement, and politically we were aligning ourselves with what was happening in the US at the time. And there was a lot of inaction in the US as well. So that's one aspect of it, like that political inertia on the issue.
And then I would say the other aspect of it is we have a very conservative culture in Canada when it comes to banking or anything to do with finance, even trade finance. And by conservative, I mean we like to prioritize financial security and stability, which is obviously important. But that has meant that we have concentrated a lot of our trade finance into a few small players in the Canadian market. And we don't like change because they're safe, they're secure, they don't fail. And that also means our banking sector, they're not interested too much in innovation. They're doing well and they don't see innovation as a big moneymaker for them.

And so, the lack of interest from the banking sector, the Canadian banking sector I would say also plays a huge role in this. And by lack of interest, I mean [inaudible 00:15:28], you see JP Morgan and BlackRock or all these other major banks across the world now, they're tokenizing funds, they're issuing their own stablecoins, they're developing their own own blockchain rails. And our banks are very mute in that conversation, and they're not interested in that right now. And it's more of the same of this wait and see approach, as we've seen with our policymakers. Let's wait and see what the banks and the US do and how it works out for them before we take the risk and we have to invest in this. And so, I would say that's why we're here today.

Yeah. So there maybe one thing we could clarify here for listeners and then Ali, let's hear what you want to say on this topic or on a related thing. But that when people think of just sending money between two parties, it's easy, it's all digital, what's the problem, right? Well, the issue is that if you use a traditional financial payment system right now, it tends to be slow, might be closed, it's going to cost a fair amount. These stablecoins and other things are offering cheap, fast and permissionless blockchain solutions. Could you just say a little bit about why it's different? Why is that permissionless blockchain technology such a game changer here and the banks don't operate that way?

So I wanted to start with the key element of this technology. Let's call it 2009. It's still nascent, and trust plays a key aspect here. So up until maybe two years ago, people were still betting on this whole space crashing all over again. So it takes time for users in particular to build trust in nascent technologies. And there isn't enough maturity around the user onboarding and the user experience. We're seeing a lot of products come out now, but it's still not sufficient for the mass adoption of these technologies, because you could still input a wrong digital wallet ID key, you could still input the wrong address, you could still the wrong password and lose your assets in certain places. So that trust element is where we're seeing a lot of conversion right now for the specific user, because when you remove a lot of institutions and middlemen from the process, you put more onus on the actual end users. And that was one aspect of the adoption phase.

The next one is where we are at with all of this is controlled. We solve the trust problem by building great user experience through technology on top of the back end, which is the blockchain technology. Now the element of control, because if we are on permissionless blockchains like Solana, Ethereum, even Bitcoin with the lightning network, I just need your address and I can move money to you wherever you are in the world, whether it's a stablecoin or another crypto form of value storage. So who's in control there? Who's tracking this? There are always legitimate concerns around money laundering and CFT as in funding terrorism concerns, who's actually doing this monitoring. So as we are solving the trust problem, which I'm pretty sure we've crossed a hump there, and we are in a significant adoption phase, the control problem is what's being answered right now and this is what regulation is coming forward.

To Paul's point earlier, the libertarians want Bitcoin based rails where there's no issuer of Bitcoin. It just gets mined and it sits out there, and it is the ultimate source of truth for where the money has gone from in two in all their pseudonymous wallets and IDs. You don't really put your name out there when you create a wallet. So there is this faction if you want out there in the world.

And then the other one, which is part of the global economic banking system that got us to where we are today, where we know more or less how money moves. We know more or less what's the ownership of the funds. There is more or less insurance around certain amounts of funds in the bank. So if these get lost, you can get back some of this money. So that aspect of control is in question right now. And this is where a lot of our minds and ideas are coming, so that we maintain safety while not stifling innovation.

Policy Prompt is produced by the Centre for International Governance Innovation. CIGI is a nonpartisan think tank based in Waterloo, Canada, with an international network of fellows, experts and contributors. CIGI tackles the governance challenges and opportunities of data and digital technologies, including AI and their impact on the economy, security, democracy, and ultimately our societies. Learn more at CIGIOnline.org.

Original Satoshi paper on Bitcoin, it was going to be this cryptocurrency, hence the name. It was actually going to be a new currency. It hasn't played out that way at all. Like Bitcoin, you mentioned the Bitcoin Maxis or others that would actually see that happening, but it's not on that track right now. It's actually moved more towards efficient settlement, low cost and things and it's kind of this trust battle. So that's one thing that's changed quite a bit. What else has really moved in the system? There are now ETFs, like the Norwegian Sovereign Wealth Fund I think owns Bitcoin. Harvard Endowment owns Bitcoin a couple of weeks ago. These are not marginal players or in the shadows, so it is mainstreamed. But it's not a currency, and now we're kind of heading toward this stablecoin conversation which is still dependent on crypto. So what's fundamentally changed? Is it just now it's mainstreamed enough, it's just a trust and kind of battle that's playing out, Ali, as you were saying? Is that where we are now?

Yeah, I think the key thing that changed in the most recent phase is broader adoption through increased trust. So as more people learned how to interact with these systems, as more fintechs brought forward more easier onboarding, on-ramping, off-ramping, cheaper onboarding, on-ramping, off-ramping, five years ago you would pay a 10% tax on getting in and out of crypto. Now you're lower to around where the credit card fees are around 2%, 1%. So all of these are really helping the broader adoption. And we are effectively witnessing a digitalization of the traditional finance.

So there still is a lot of paperwork that happens on the background, but now we are witnessing a parallel. You have the traditional paperwork keeping the banking systems with an on-chain component of the types of stablecoins of, oh, this is completely digital now and it exists, but you also have a third one which is the Bitcoin Maxis. And you have countries that have gone Bitcoin Maxi like El Salvador.

So I wouldn't say to your point earlier, Paul, I wouldn't say that the Bitcoin Maxi current is completely gone. It's living out, there are POCs happening out there in the world and El Salvador is a great countrywide proof of concept that's happening. Everybody's observing that example. And if you alluded to the 2009 as the first black swan event that pushed adoption on the cryptocurrency front, another black swan event with a monetary crisis could actually push a lot of people going Bitcoin Maxi, then converting whatever remaining funds they have into Bitcoin and starting to figure out how to use payment networks that use Bitcoin,

Seeing it as more secure and more in their control.

So I'll just add that to my earlier point, there's that discussion around retail speculation of assets that are investments versus infrastructure. And so, I think there is that sort of divergence right now of when we talk about crypto assets, whether it's Bitcoin or Ether or other types of tokens. And I would say the reason why you're seeing so much uptick from some of these institutions is because they see it as an investment, not necessarily utility. Obviously the ecosystem is different, definitely a lot of utility when it comes to crypto assets within the decentralized ecosystem.

But when we're talking about some of the institutions that you mentioned, I think they view it more as an investment. Where stablecoins comes in, is that divergence I'm talking about when it comes to the discussion around infrastructure, because stablecoins are effectively crypto assets, but they're pegged to a stable value, like one-to-one with a fiat currency and they're using reserves, sometimes algorithms, but for simplicity's sake we'll just focus on fiat-backed stablecoins.

And so when we talk about issuing a stablecoin, we're really talking about taking that representation of what's in the reserve and just putting it on infrastructure, which is blockchain. And so when we talk about enabling payments and cross-border settlements and trading liquidity, that's the infrastructure, that's what we're talking about, which is why stablecoins have recently risen up so much in relevance, especially policy relevance, because it's of interest to everybody because it's a massive innovation on infrastructure. And so that's sort of the difference where I think the investment versus the infrastructure I think is an important distinguishing point.

Thanks for laying that out. Ali, I'll come back to you for a second. I wonder if you have a reflection on whether there was a defining moment or shift or first mover when stablecoins started to be taken more seriously by regulators or financial institutions. I think we've put Canada in a particular global context here, but very curious about that. And then as a follow-up, in the instances where they're not maybe being, doesn't seem like they're being taken seriously by regulators. What do you think's getting in the way of that? You've alluded to the trust and adoption elements

Specifically on stablecoins, they became a de facto inter cross-border money movement system. For those who are in the know, not everybody knew that they existed. Tether is the best example, and what really put it on the record for everybody is when they saw how much Tether were making on an annual basis. And you're making $5 billion by doing nothing, basically just holding reserves. That went on everybody's radar. In a good way and also in a bad way, because for them to make this amount of money, trillions were moved and for these trillions to move, who moved them? Where did they move? So that also went on the radar as well.

And I always ask these questions in the right settings of, do we have enough tech to properly monitor these? But I don't want to digress right now because it's really not possible to monitor these transactions without machine learning AI and the likes. And this is where a lot of fintechs are also bringing forward some of this technology. So that was a key turn for stablecoins. This was a very genuine bottom-to-top approach where they existed, people started using them, when they grew large enough. This is when everybody came in and especially the US, because Tether, USDT is naturally because the US dollar is the world's reserve currency. So it makes sense that when Tether got this broad adoption that it got the attention of the US administration and they started addressing the movement of their currency all over the world using this digital technology.

So that's what brought stablecoins mainstream. And then it's actually very interesting to see where broader adoption of Tether came in is wherever there was economic turmoil and there was difficulty accessing hard currencies such as the US, Tether solved the problem. So you see these countries, I'll name Nigeria for example, because they're coming forward in a very interesting manner with their own Naira, the digital Naira. The adoption is interesting. If you look at their tickers, they have a good adoption on the digital Naira, but very much on the US dollar, the digital US dollar, which is in better in this case or circle.

So by the way, Tether I think is building a headquarters in El Salvador, a massive headquarters, which is these things are just completely below the radar. So there are different types of stablecoins. The data that I've seen is that about over 95% of them are US dollar backed stablecoins that are active and in circulation and being traded. But there are gold backed stablecoins. There are Euro backed stablecoins. There could be Canadian dollar backed stablecoins and there are some movement in that direction. And there could be other things that could back a stablecoin, right?

But this is the US strategy, is to dominate the space. It's got the reaction of the European Union to not allow all companies, including Tether, to operate under their regulations. And then of course China we haven't mentioned yet, and India and other countries are issuing their own central bank digital currency because they want to control it more. But they also want a way to not get dollarized by the use of these stablecoins. And so, for countries like Canada, middle power countries, middle-sized economies, if we just wait and see what happens, we're at significant risk here. And so, how do these stablecoins work? How do they maintain this peg and just maintain that trust that they're actually stable? You mentioned algorithmic stablecoins more, and we won't go there, but the ones that are backed with something, a hard asset, how do they maintain this peg and their credibility that people are like, "Yeah, this thing's going to hold its value"?

I'm not fond of algorithmic stablecoins as well. Just recently a few weeks ago, DAI, which is one of the best powered algorithmic stablecoins, did experience a de-peg for a very short period of time and the CEO had to come out and do a lot of justifications. So especially in this era and phase where full trust in stablecoins is not yet out there, it's important that we be as conservative as possible on how we are powering and maintaining the pegs on these stablecoins.

So from let's say a fiat-backed stablecoin, which I mean, I come from this space, you basically need a very transparent reserve reporting system. So if you're giving me a dollar, I need to show you a way that I'm keeping your dollar and safe keep. This is where your dollar is being safely kept and here's the digital dollar in exchange for it. It's as simple as that. Openness on where the fiat dollars are stored so that the users of the digital dollar know where the money is, and you maintain that trust through transparency. Whenever you get more deposits, you are able to mint more digital dollars. This is the term that is used and effectively it's, or technically it's a smart contract that you tell the smart contract, now I have a million dollars in my account, let there be a million dollars in digital dollars in circulation. It's a very simple balancing act between how much you have in your traditional bank account and how much is out there in the world in digital circulation. This is how you maintain a stablecoin peg in a fiat-backed scenario.

Thank you. That's super helpful. Morva, I'm going to ping pong back over to you, if that's okay.

I think yeah, he covered it. It's really about ensuring that issuer holds high quality assets equal to the number of stablecoins in circulation, specifically with regards to feedback stablecoins, so this means cash and bank accounts, short-term government bonds or money market funds, and that the reserves are held by regulated custodians and they're verified and auditable. And then there's that issuance and redemption piece as well. So if I send a dollar to an issuer who mints one stablecoin sends it back to, that's what we mean, but then it's also redeemable. And so, this is the trust that Ali's referring to in terms of ensuring that this process actually happens, which is why regulatory framework is super important when it comes to stablecoins.

Absolutely. And you had mentioned earlier you were gesturing I think mostly at the US in terms of how more maybe traditional financial institutions are already starting to engage with stablecoins. Maybe sometimes we're seeing private actors or more traditional actors moving forward, when there are regulatory vacuums or uncertainty. Could you tell us a bit more about what you've been observing in terms of TradFi engaging with stablecoin and other digital assets? You sort of said in Canada, we don't really see the appetite as much or we're a bit being a bit more risk averse or more wait and see. Where might there be some places where we're seeing a genuine collaboration between regulators, banks and crypto innovators? Or does it tend to still be more of a clash or more of a race?

I am of the belief that everything can coexist, and that this technology can enhance productivity and efficiency within our current financial system, like within TradFi. And that's why you see banks like JP Morgan, for instance, I believe they issued JPM coin, which was a stablecoin. And you see BlackRock and Fidelity tokenizing money market funds, it's all about driving efficiencies for their customers. But I do think that there is a way that all of these things can coexist in the market to just provide more choices for consumers in terms of their ability to transact cheaper, 24/7, but also for businesses.
I think there is one of the reasons, and going back to your last question around why did stablecoins become such a big deal? Because it was the one issue where the crypto industry could really rally around, because it had so much utility to the entire crypto industry, regardless of where in the digital asset sector you were playing. So there's that trading and market liquidity piece, the payments and settlement piece, the cross-border transfers and remittances piece, and then the DeFi piece as well.

And so, I think that a lot of those use cases can be cross-adopted in TradFi as well, and that's why you're seeing so much interest from American banks or banks in the European Union or even especially in the APAC region, because it helps spur competition and innovation, makes things cheaper and faster. And I think that if we all rally around that, just like the crypto industry that around infrastructure use cases, I think there's room for everybody to thrive here, for not being overtly protectionist of our old ways of doing things and our 50 plus year old technology.

Yeah. I wanted to add a couple more things. So especially to what Morva said around the efficiency. So what increase the adoption or ramped up the adoption on stablecoins is the utility. And to be specific about the utility, it's two things. The speed and availability of money. So you do a stablecoin transaction. On the slowest chain today it's a 12 to 24 second settlement time. So literally, this is how long it takes for the money to move from one place to the other, versus with the traditional systems, let's say you're a merchant and somebody paid you with a credit card, you don't really get that money until the end of the month.

If you're sending money to somebody overseas, they don't really get that money to a bank account until two or three days later, depending on where they are in the world. And for people is one thing, for businesses and institutions, it's another and it gets... Each one of them has their complexities. So the first one was the time to settle, which is instant. This money moves now. And the second one is the cost of moving this money. A Swift transaction is horrendously expensive. There was a study by the analyst Eric Yeung, and he showed one transaction that a hundred thousand dollars transaction cost around $4,950 to settle using Swift and it costs $0.12 to settle using a stablecoin. And it wasn't even Tether in between. It was the digital Yuan that was used as an intermediary. So it's just no-brainer when you have a technology that reduces cost by 90% and infinitely improves settlement time, it's bound to become ubiquitously accepted.

But it cuts out a lot of intermediaries who are making noise of the change system.

If I could just add one thing, is that this ultimately comes down to whether or not we want digital asset firms or fintechs to be integrated into the banking system. And that is obviously going to be contentious for the incumbents, because of competition and the regulatory implications for those who have put in so much capital, regulatory capital to play in the financial sector space, even following the passage of the Genius Act where firms like Circle, Ripple, Fidelity could apply for their national bank or national trust bank charters. The five major US banking associations came out against this, and saying the granting charters to firms whose primarily activities are not traditional fiduciary services is a risk to our financial system.

And so I think what I suspect in the next little bit or in the next few years is that we'll have a lot of this push and pull around what banks will argue is financial stability and security, and the security of the existing system. And then the FinTech industry will argue that we need more innovation, we need more competition to drive prices down, to provide more choices for consumer. And it's the job of regulators to find that balance to strike between that financial stability and security innovation, because that natural push and pullback is always going to be there. But even within the US, that pushback is happening now, and it kind of speaks to the inertia that we're seeing with our Canadian banks today.

So there's a lot of converging pieces here. You've got the new technology, you've got financial systems which are expensive and need to be updated anyway, probably just in terms of an efficiency perspective, you've got a US dollarization play, you've got China interested in promoting the digital yuan, you've got it all really. How are things going to play out? Are we going to see a world where we've got all of those things? If you're Canada, you're going to need a central bank currency to transact institutionally with players perhaps in Canada, perhaps with other central banks. You're going to need a stablecoin. You're going to have to decide whether it's in US dollars or not, if you want to use US dollars. Bitcoin is mainstreamed, that genie is out of the bottle. You're going to have all this and emerging things like Ethereum, Solana, other smart contract things. Are we going to see that all? How's this evolving? Stablecoins are one piece of it, but the whole thing is a smorgasbord right now. What's it going to look like? Pull out your crystal balls. Ali, do you want to go first?

Yeah, no, absolutely. I think just to start from probably where we end the typical protectionism and weight and do nothing is really going to work against Canada in this emerging world right now. I look at it as there's a huge white space out there that was created using this technology, and whoever is empowered to go out there in the world, not just within the local Canadian offerings as a FinTech or a local service, whoever is able to go out there and make the deals, create the technologies and the financial bridges into all these new territories is going to win long term, five, 10, 15 years from now.

We won't see the pain of doing nothing and protectionism immediately, but it will very rapidly become apparent once the dollar flows or the currency flows move onto the new rails that are being built all over the world. So that's in a nutshell. Now, what does that mean more specifically? A little bit to your point earlier, Paul, and about reserves and how we are coins and these currencies, how are they being managed? Everybody has a role to play in this new world.

You cannot expect a FinTech to manage enough funds that are the size of the funds that move amongst banks. You cannot expect banks, like commercial banks to deal and work with funds that move amongst governments. So everybody has their role just like they have today. They have one in the new digital economy and we need to empower each one of these players to do what they're best at. I do not expect a central bank digital currency to worry about onboarding users and doing customer support for a transaction that did not go through. So as we look forward into that future, it's important to understand what our role's going to be. What do we want?

You raised a very important question of dollarization. We've lived in a dollar world for so long, but now as we're seeing active attempts at de-dollarizing in certain jurisdictions as we have an active trade war and with tariffs flying back and forth with the US, we also need to ask ourselves what do we want in that future? And then regulate and enable players accordingly. And just finally, it's a world of infinite possibilities right now. Not all of them are great. A lot of them are. And an active dialogue on finding what these things are is valuable. But what I can guide is let's start with what we know best. If we know there's a technology that is cheaper, that is more efficient, that is faster, let's at least start it where it might hurt the least, which is around consumer payments or some cross-border payments below a certain level. Let the players start playing in this and learn from them and then we can regulate on the fly.

If I can just add to that, I do think that moving on these issues, whether it's wholesale CBDCs or stablecoins is protectionism policy for Canada. It's protecting our sovereignty. Like Paul, you mentioned 95% of stablecoins in circulation are US denominated, which is why under MiCA and the European Union, they applied a cap to non-Euro denominated stablecoins in their market. So I would actually argue that this moving on regulating and also enabling the advancements that we're seeing from an infrastructure perspective and what's being offered on the CBDC front or on the stablecoin front that could be unlocked by regulation. I do think to some extent you could say that that is us being protectionists because if we don't act, the geopolitical risks are big in the next few years, not even in the next decade because things are moving so quickly.

Maybe we can close with picking up on that. Maybe we can close with the question around tokenization, which we've alluded to but not maybe dug into. How might the tokenization of real world assets kind of reshape ownership and investment?

I mean tokenization is happening and anything that can be tokenized will be tokenized. It's just a reality now. Everybody's saying it. The actual institutions that hold the records for ownership are all actively pursuing tokenization. Why? Because it infinitely opens up the market through fractional ownership. If you think that let's say all the assets in the world now are a trillion dollars, that they're much more than that, once you tokenize everything, they will become like a thousand trillion dollars because all of us can partake in these ownership.

Plus it allows for the creation of financial products that we still don't know what they are yet. These are things to come there. There's a lot of innovation to come on that front as well once that tokenization happens. Very importantly, once everything is tokenized, there's an important notion to understand here is that we all become data brokers. So as everything gets tokenized, your ownership of anything is basically a data record that's on your phone. Your data is going to become tokenized as well. And the new sets of laws and rules, after these smaller humps that we need to cross when it comes to digital assets are how do we manage all this data movement to come forward? But it is an exciting world where think of it as truly borderless, where everything can move anywhere at any point in time. And we are in the process of understanding our own boundaries right now before we open them into this borderless world.

If I can just add to that, I always like to think about things in terms of who loses from innovation, because that's obviously important to understand why we uphold the status quo. And it does go back to that what we talked about at the beginning of this podcast around where does all this come from? It's trust, it's control. And when we talk about tokenization, who really loses out on this is middlemen who benefit from slow, opaque processes, traditional custodians and brokers and transfer agents, like the intermediaries in these illiquid markets. Gatekeepers to exclusive investments, like tokenization really has the potential to democratize access to different types of investments for a whole host of people that right now only exclusive number of people have access to.

And so, I think those are some of the themes that we'll have to contend with from a policy perspective, especially as we talk about access to alternative investments for the broader general public, especially with affordability pressures. I think a lot people want to be able to control their finances and their investments more. They want to be able to diversify more, because they should, because there's so much risk in our economy right now. And so from that perspective, it's important for policymakers to think about it within the context of who's losing out and do we care that they're going to be losing out.

Yeah. On the issue of if the assumption is the tokenization of everything is the direction we're heading in, and I think there are a lot of indicators that it is, ultimately you get into big things from a government perspective like tokenization of the bond market, which is like hundreds of trillions or a couple hundred trillion. The real estate market is the biggest of all because that is this smart contract element of it could change the way. And as you were saying Ali, that you have to become, have to manage your data, you have to know that you can trust it. It becomes so essential, that we're not ready for that world yet because those systems are not clear enough in terms of the trust and the backstops and things, but the technology is kind of pushing us fast in that direction. So lots of interesting dynamics ahead of us.

Had a comment because it's living in my mind. And when Morva of us said that protectionism, it is protectionism, I love that you shared that. Because we are at a point where there's no more good defense, there's only just offense. And the image that comes to mind is the one of Daniel Day-Lewis, where you know how that guy in this movie tried to protect himself by having his lot? And then Daniel went around and bought all the lots around it. And then the milkshake example, if we think that we've built the walls around ourselves in our banking sector by not adopting or not enabling these stablecoin technologies or digital asset technologies, what's happening is all over the world, they're tokenizing against the US dollar. And what we will find with us being late to the game, nobody's tokenizing against the Canadian dollar and there might be nothing left for us to go after.

And sorry, and it's hard to wrap on this, and that just as say the Swiss Franc became something that was a bit of a reserve asset, a stable go-to place, there's no reason the Canadian dollar couldn't be one of those, especially if it was backed by a strong fiscal regime, et cetera, et cetera. So we could actually do it. We could position ourselves well there, but it's a big jump.

Well, it's a good place to end on. I think we covered so much ground. Thanks both of you for joining us and for your patience and everything that you've shared.

Thanks a lot. Thank you so much.

Thanks for having us.

I mean, it's interesting because the future of money is already here. Canada's already living kind of in a stablecoin world, but our rules aren't right. And time and time again, it seems like, again, sorry to root it in Canada, but it seems as if we have this profound regulatory lag that leads to a lot of uncertainty, but just it means that our rules don't reflect the reality. So I really appreciated talking to Morva and Ali about where should we be going here and how do we think about this, and how does the US context kind of prompt or spur Canada to kind of clarify a framework here.

Yeah, I think future historians like saying what were the transformative technologies that came along during this or that period of history. Crypto will be on that list, I'm pretty confident, and stablecoins may turn out to be the prompting piece that broke open the whole system of digital finance and pushed in a new transformative way on the financial architecture, and had impacts for payment systems like credit cards and remittances across borders, and then ultimately even monetary policy, where it either helps boost the US dollar rule, because people keep buying US dollar stablecoins, and therefore they can buy more treasuries and keep the US debt market going, or not. And it doesn't go that well, and countries like Canada have got to figure out how they fit into this and in a hurry, because otherwise there's the first mover advantage where everything's done in US dollars and it's kind of like Canadian dollar doesn't exist. So we've got a position in this space as other smaller economies need to as well. The US of course doesn't want that. They want to completely dominate this market.

Well, and it also feels like no matter what Canada does do, we will be punished for it in this context. So the context of the trade war, it's not just about tariffs, it's power, influence, and control. And anything that the country does to assert or reassert sovereignty will absolutely be, there will be retaliation and a price for that.

Yeah, it's coming on this one. Definitely as you say, there'll be in the trade agreement that Canada and the US are negotiating. The role of stablecoins will come up. You've got to use these, right? You can't put in barriers to stop them. That's going to be a big issue. And these kind of things, they'll just take it as a, of course you can't put a barrier against those, and we'll have to respond with, of course, we must, because otherwise it'll be full domination by the US as it has been in some sectors, and we're paying that price now, as we see our capacity is low to do some things we should do in Canada.

Glad we tackled this.

Yeah, it was fun. It was fun talking to them and exciting space. Lots of going on here for entrepreneurs, for regulators, for policy wonks, for crypto fans. This is a convergence moment.

Policy Prompt is produced by me, Vass Bednar, and CIGI's Paul Samson. Our supervising producer is Tim Lewis with technical production by Henry Daemen and Luke McKee. Show notes are prepared by Lynn Schellenberg, social media engagement by Isabel Neufeld, brand design and episode artwork by Abhilasha Dewan and Sami Chouhdary with creative direction from Som Tsoi. The original theme music is by Josh Snethlage.

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