Dr. Sean Stein Smith: https://www.linkedin.com/in/dr-sean-stein-smith-dba-cpa-63307444/

President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins: https://home.treasury.gov/news/press-releases/jy0454

Stablecoins Might Be On The Hot Seat, But Are Integral For Crypto Innovation: https://www.forbes.com/sites/seansteinsmith/2021/11/29/stablecoins-might-be-on-the-hot-seat-but-are-integral-for-crypto-innovation/?sh=6628d556674d

FULL EPISODE TRANSCRIPT
Adam: (00:04)
 Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. This is your host Adam Larson, and for episode 156, we welcome back Dr. Sean Stein Smith. With the constant evolution and advancements around crypto. Sean joins count me in again to talk about various reports and newsworthy information relating to stablecoins and digital assets. From standards on cryptocurrency to NFTs and decentralized finance. You'll want to keep listening to learn about what it all means and hear some of the potential future implications. Let's head over the conversation now.
 
 Mitch: (00:48)
 So Sean, you've joined us for a few episodes now and in previous conversations you've discussed blockchain. Lastly, we talked about accounting standards for cryptocurrencies. Now there have been more advancements and additional considerations around crypto assets. I'd first like to get your thoughts on the report and the recommendations on stablecoins from the president's working group on financial markets. I know that came out a few weeks ago now, early November. I was just wondering if you can kind of summarize what was included in that report and why it is so important as an update.
 
 Sean: (01:21)
 Absolutely Mitch. And I'm always happy to be on here talking with you blockchain, crypto asset updates, because it really is one: a hot topic and two: an area that is increasingly of importance for everybody working in accounting, finance, economic roles, whether in industry management or elsewhere. So, so in terms of sort of the highlights and the core points in the president's working group report there really what I would say is that honestly, on the one hand, I would say that the involved actors, right, be it, the OCC, FDIC, private sector corporations had done a pretty good job at outlining the, the base case and the fundamentals for how a stablecoin operates. Right. But on the other hand, they were, I believe a bit overt or unbalanced in terms of how they analyzed the whole stablecoin ecosystem, right. In terms of the pros and the cons. And especially in terms of the, risks, right, that having a actual stablecoin based payment network actually get, get to that level of being used at a commercial level by either corporations or by whole nation states. But, overall, probably the top two or three points there is that one they've, they've done a good job at researching and trying to pull out sort of who the, big players are out there. And there honestly really only are a handful of them and the, and the bulk of the transactions happening in any stablecoin outlook now are handled by a, by a handful of organizations and the bulk of those, transactions are also happen with coins backed on the one-to-one basis at the US dollar. And then two, sort of they also did a good job, I believe at outlining sort of the pros and cons, obviously more on the cons side, but, but a pretty good job at outlining the pros and cons of having a stablecoin based payment network versus the current Fiat based network. And then three. And, and here's where I think there's the most promise, but also the highest risk. On the one hand, they also outlined and by they, I mean, the members of the working group, outlined really what, what, factors and components any organizations trying to use a stablecoin payment network would have to take into account meaning who the counterparties are, who has the insurance, and then how are these platforms and these connections between these different involved organizations able to be secure. And then ultimately the end result of all of that of that conversation and I believe the actual report was about 28 pages. The end result kind of mirrors the policy paper put out by Coinbase back on October. And, and in both of those white papers, both of which were between 15, and 30 pages long. So they aren't massive documents, but the end goal or the end call to action on both documents, which I find quite interesting is this call for a new crypto specific, regulator that, that, that has powers or is imbued with powers by, by Congress to directly oversee all aspects of the, crypto asset space. So overall probably I would give it like a "B Minus" in terms of the output. Cause on the one hand, the working group did a good job at outline the issues, outlining terminology, characteristics, and traits, and, highlighting some of the core issues out there. But they were, I believe a bit unbalanced in their outlook in terms of the pros and the cons.
 
 Mitch: (05:31)
 It's so funny, you bring that up because I read through the paper and as we got towards the end, you know, particularly when they summarized everything at the end, there's a statement that they gave, it says while the scope of this report is limited to stablecoins, work on digital assets and other innovations related to cryptographic and distributed ledger technology is ongoing throughout the administration. So it sounds like they are aware that they did not cover everything that they needed to necessarily, or maybe something else is in the works. You know, that's kinda where I was going with my next question. Other innovations in this space, can you take a guess at what they might be referring to?
 
 Sean: (06:11)
 I mean, man, if I had access to that data, I mean, I'd be on a beach somewhere, which, but probably if I had to hazard a guess, I would say that the top two areas, and obviously there have been quite, public comments out of the SEC and the IRS in terms of their really uptick in compliance efforts, collection efforts, enforcement efforts. So I would say that probably one output or outcome that I am sort of eyeing to happen during 2022 is that there is going to be out of some agency don't know which one yet. I would say probably the SEC there is going to be some sort of, framework or guideline to help companies get a better handle on which type of crypto asset falls into which, financial instrument bucket. And by that, I actually mean if I'm issuing a token or a coin, is that gonna be treated as a, equity, security, commodity or some other form of instrument? So I say on the one hand, that's probably an area, that they are trying to work on and by they, if the White House Congress and the various, oversight agencies, and then two, what I would say is that currently I'm hearing quite a bit of, chatter about NFTs, but I haven't hearing quite a bit about NFTs because even though now the conversation around NFTs is, you know, kind of focused on like the Board Ape NFTs and you know, Beeple in March of this year. And it's more athlete and artist and artwork focused the implications for this new type of crypto asset nonfunctional token, or, NFT are actually quite broad. So I would not be surprised at all if, you know, going forward NFTs are an area that the White House and policy makers and regulators try to really get a handle on, right. Because they because on the one hand, Bitcoin is the headline news story, but that's kind of old news, in terms of hacks and other policy choices, right? Like it or not, they've sort of outlined how they view Bitcoin. And now in this president's working group, they've basically started the ball rolling on trying to regulate, any stablecoin issuers, whether, whether it's correct or not is a whole other conversation. But, and so then I would say NFTs are the next big area. And then DeFi is also probably the, the next area. I'd say NFT's more concrete, because to be honest with you, DeFi is still, a fast moving and it is so new that I don't think many policy makers have the, expertise to have a real conversation around DeFi quite yet.
 
 Mitch: (09:28)
 So let's stay there for a second. I know you referenced getting to NFTs and I guess, you know, we can transition there first and we'll jump back to, to where we need to. NFTs were so hot, again, non fungible tokens, so popular. It seemed like everybody was talking about it. as early as you know, it seems like yesterday, but then at the same time, it seems like it's cooled off pretty quickly compared to something like Bitcoin or some of the other stablecoins. So what, what happened? Are we missing something or is it still heating up? You know, what's the status on NFTs?
 
 Sean: (10:00)
 NFTs are an extremely interesting area, right? Because as I was saying, just, earlier that the guess one of the main focus has been on, you know, artwork and entertainers, Tom Brady's in it now. John Cena is in it now, you know, there are all of these athletes and entertainers that have either, you know, committed their own NFTs or have been endorsed by NFT trading platforms all the rest. So yes, absolutely. Right now, there is some fraud out there in the NFT space and actually during the middle of November, there actually was a headline that actually quite a few of the more recently issued as of that time NFTs dropped by 80% in economic value, which I think is obviously bad if you are a holder, of those NFTs during that drop. But, you know, it's a correction and it's painful, but it's part of how the asset class is ultimately is ultimately gonna have to grow, right. Because sure, NFTs are new and they're hot sort of frothy, but the underlying economic opportunity in a NFT niche, it's a traceable transparent immutable record of ownership in a, virtual world. And so that idea, that concept is tremendous, right? So that's really, and I know saying that that the real story is in blockchain is an old phrase, right? It's an old hope at this point, folks joke about it, but it's the first application that I've seen LIGO mainstream that highlights the true opportunity of blockchain for the individual, right? 'cause most enterprise applications at these, you know, Fortune 1000 companies, you know, aren't really comprehendible to the average person on the street. Right? But the idea of a NFT that now I own in the virtual sense, right? I own a portion. I own a share, I own some rights to some other asset and it's on the blockchain. So traceable transparent, can't be hacked and I can prove it to anybody at any time, anywhere. That opportunity is absolutely I think really untapped, but to go back your actual question. Yeah. I mean the NFT's life cycle, it, I think peaked in March, well, first peak was in March, right when we had the, people auction. And, you know, I say March and April was red, hot cooled off over the summer, much like the other crypto assets out there. And then honestly, in the fall. And I believe it was Tom Brady partnering with, I believe the company is FTX, his partnership, I believe it was him, Gronk, and a whole host of other athletes and entertainers, NBA. Top Shot's probably the, the mainstream platform that most the people have heard of in the NFT space. All of that has kind of given the NFT space, sort of a new, burst of energy. So it's hot. It isn't as hot as it had been previously, but it is, I think starting to ratchet back up to those levels.
 
 Mitch: (13:34)
 Now I am most familiar with NFTs because of, you know, Top Shot, like you just mentioned, and Brady is coming out with all of his, NFTs and all the different people who are joining in on his group, having conversations outside of here and with friends and, you know, offline, I think the challenge is really identifying how is this so much different than like a picture online, essentially, you know? And I had this conversation with a couple people, and I think what you just said, as far as the blockchain technology and tracking everything is really the answer, but at a very simple level, is it the fact that it's exclusive, right? You know, if you have a tangible basketball card versus an NFT, the exclusivity of it is what adds value is that correct?
 
 Sean: (14:20)
 So, so a good, parallel, right. That I've been trying to use is that if you have a NBA basketball card and it's autographed by who ever your, you know, favorite players, Kobe Bryant, Michael Jordan, Shaq, all the rest. Right? And so I have this, this basketball, and it's actually signed by that person, Michael Jordan held the Sharpie and actually signed. Okay. And then on the other hand, I have that exact same basketball. Right. But it has the autograph of Michael Jordan, but it was, you know, burned into the basketball at a factory, which one has more value? It's the, it's the basketball that is, that is actually connected to the entertainer, to the artist, to the creator of that asset. Right. And so if I have a picture, if I have the, Mona Lisa famous painting in the world price with that, I'm no art expert so I don't quite get it personally, but, either way, right. It's a, you know, internationally famous paint thing, priceless why? Right. It's priceless. And it's valuable because it is the only one out there. Right. It's the only real authentic version of it as far as we know, but, I can go online, I can Google it right now on this podcast with you, I can go online, pull a picture of it, print it out, frame it, hang it on the wall that doesn't have any economic value, but an NFT, right, tracing the, the Providence and the history of that artwork or real estate or, athletes merchandise. That's the true economic value there. It is not always the asset itself. It's the connection of the asset to the creator of that asset. Be it artwork, entertainment, real estate, it's that bright line, it's that proof of ownership and Providence, and anybody who's done any work in any supply chain over the last 18 months knows the importance of having control and having traceability in terms of, you know, Providence ownership of that asset on that path. So that's the real difference there, Mitch, is that now I have that direct connection to that basketball hand sign by Michael Jordan, as opposed to buying 85, you know, basketballs online that have his autographs, but it was a copy and paged up at some factor.
 
 Mitch: (17:08)
 Perfect example. You're absolutely right. It definitely makes sense. So thank you for kind of breaking that down step by step. I think there is so much that goes on in this space and everything is changing so rapidly, you know, it, it's really good to provide updates like this, take a step back, make sure everybody really understands what everybody is talking about before something new comes out. Right. And, you know, I think you are just talking in alignment with NFTs. You mentioned defi, right? So I think it's only appropriate that we kind of stay in line here. Give us a breakdown of defi, why it's so important and what our listeners really need to know.
 
 Sean: (17:47)
 Mitch, I mean, yeah. We could be here talking on DeFi for eight hours, so probably have a fresh battery. But in terms of like the baseline, right. DeFi, it's an incredibly complicated topic because it's a umbrella term, right. DeFi can actually point to anywhere between 12 and 15 different types of applications, it could be yield farming, staking block rewards, all of which are trying to maximize the, yield earned on crypto holdings, but the overall idea and the goal of any of these applications, right. And there are any number of them online to go into, you know, research learn about rest, but the overall goal here DeFi, decentralized finance, it's to try to really build out a parallel financial system. Right. Because, if we sort of pull back for a minute, the whole goal of blockchain and crypto is to help develop a parallel financial system, right. To cut out intermediaries payment processors banks, that, that hasn't happened as we've seen every major payment processor and bank and corporation, and actively now embrace blockchain, crypto payments all the rest. But the promise of, project DeFi it's really to allow individuals or institutions who are trying to, for lack of a better term exist in a crypto based world. So Mitch, if you have $8,000 cash hanging around, right, you have options could put it into bank, could put it into Apple stock, can buy some CPE courses at the IMA, or can put it into a ETF, right. But you have options. You can either grow it, use it all the rest. But if I have that same $8,000 value in tether, right. the USDT token issued by tether a stablecoin issuer that's supposedly on a one-to-one basis at the US dollar. And I could go on a hold, offshoot on that, but, but it's backed by the US dollar. And so how can I make the best use of that money? Well, the bulk of these DeFi applications out there are built to allow holders and individuals and entrepreneurs for like me who have their business or have holdings in crypto. I can't deposit those at the bank. If I can't use those to go buy Apple stock, I can't put them into a ETF or an IRA directly. So then how do I earn a rate of return on my assets? And that's the question that most of these DeFi applications are trying to answer. And so the best way to understand DeFi is to basically kind of picture it as trying to offer all of the products and services, convenience of a bank or a traditional, brokerage, except not involving a bank or a traditional brokerage. And so that's the best way to try to think about it in terms of enterprise applications, there are not all that many yet for the very reason that the regulation on these companies is kind of still murky and it's primarily been, regulation by lawsuit up until now.
 
 Mitch: (21:35)
 So we've talked about a lot of different trends going on here, and, you know, a lot of our conversation has been US based and things that are happening within the United States. Just curious, before we wrap up, I have one more follow up question, but as far as the things that are happening in the US, you know, the president's working group, I know there was, the infrastructure bill that's going to include some tax reporting provisions for digital assets, in your opinion, what kind of implications will these decisions have on the global environment, as it pertains to digital assets, you know, clearly digital assets is not just the US based assets. So, what else can the global business environment expect down the road from things happening.
 
 Sean: (22:19)
 And you highlight a excellent point there, Mitch, that this asset class is not based out of any market. This isn't based out of the US, based out of mainland China, or Europe, or Africa, Latin America, anywhere it's a truly global asset class and global ecosystem. And so on the one hand, I am encouraged that there are policy moves being at least put forward here in the US. On the other hand, I do fear that we are taking a bit of a heavy handed approach to trying to understand, and we're trying to force, crypto assets to fit into the current roles that current financial instrument hold and it could work on the surface, but it is not gonna work going forward. But on the other hand, even though crypto is a truly global industry, it is still worth mentioning that the US is, I believe gonna have a important voice in how these rules and frameworks are ultimately crafted. Now there are countries El Salvador Malta, other areas of the world, Estonia, Brazil, you know, there are any number of other countries that have been more active in being pro crypto out there. So it's important for us to balance our attempts to protect, investors and all the rest with the eye towards future opportunities. But my sort of wrap up point here in terms of the global impacts is that the only other global counterweight at the US level is mainland China. And whether you are a fan of this choice or not their choice on a policy, angle to ban crypto, basically over and over again, to ban trading, to ban mining to ban holding of it. I mean, that does basically open up the door for the US to basically still have a initially dominant voice in this conversation.
 
 Mitch: (24:37)
 So to wrap things up, kind of in that vein, you, you have obviously done a ton of research on this. This is, you know, your passion and, and highly knowledgeable. I'm curious, you know, talking about the report that came out and some of the, movement that has been made recently, you have an opinion, and I'd just like to kind of wrap things up by asking you where you believe the focus really should be when it comes to digital assets. You know, as far as the progressing this whole industry really forward with all the different trends and all the different outcomes from these different innovations, opportunities, possibilities, what should be, as far as the focus of everybody's efforts, what would make the most sense to bring things to light for everybody who's involved in this industry.
 
 Sean: (25:27)
 I think that the top two areas that should be top of mind for any policy maker, regulator, or entrepreneur out there in this space on the one, it should try to be the foster innovation and creativity, right? Crypto assets are a $3 trillion asset class, and 10 years ago they hardly existed. So it's grown incredibly fast and, and no asset class grows that quickly on a international basis if there is not some underlying economic value too. Right? So, it's important to foster innovation to try to attract as much capital and people, right. You know, intellectual capital, human capital, financial capital, as we possibly can to these projects because Mitch, you know, it's awfully tempting to, to point to, you know, incidents, right. It could be a hack, it can be the NFT bubble, you know, kind of popping here and there, but overall with blockchain and crypto one don't exist in a bubble, right? They are evolving with and being improved by automation and RPA, AI, and IOT analytics. All of these tools are developing hand in hand. And so I think that overall, everybody should be focused on trying to create a environment and a framework to foster innovation, and to try to allow people the, you know, freedom to develop the experiment and yes, fail sometimes. But it's important to have that creative process happen, to be able to get to the products and services and companies that are gonna benefit the most people going forward. And then two, it's also important that as we are doing this right, so a good parallel that I can do all the right now that's all phase highlight is that as we all know the issues around, our climate and climate change are a big issue right now, I won't get into the individual politics of it, but it's an issue, right? And so there has been a move towards more ESG, towards more investment, towards wind, water, hydro power, all the rest, but all of that can't happen overnight, right? There has to be a transition period off of the coal fossil fuel model and into a more hybrid model, right? Some fossil fuel, nuclear, wind, the water, solar all the rest. And so that has to also happen here, right? Because at a fundamental level, blockchain and crypto assets operate differently in terms of the transactions themselves and the risks and opportunities that all involve counterparties have to keep in mind as they try to move into this space. So there has to be some sort of plan, again, building on 0.1, there has to be a environment and a framework to balance innovation and creativity with this, mindset that, yeah, mean virtual payments, digital they're already here, all that we're doing now, blockchain and crypto is trying to sort of improve them. But there has to be a process to transition, you know, countries, institutions, individuals out of basically the analog world that all of us live in web 2.0 all the rest to a blockchain based crypto, augmented future. And I know that having that can kind of sound high in the sky, but it's already happening right now. Right. And there are trillions at, you know, being put to work here. Every major corporation and country in the world is actively doing this as we speak. So it really isn't so farfetched, I would just hope to see right. That going forward, that there's a more over focus paid to this.
 
 Closing: (29:40)
 This has been Count Me In, IMA's podcast, providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like, what you heard and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.