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“It’s much easier to apologize than to get permission. In this world of computers, the best thing to do is to do it.”

— Grace Hopper

Stablecoins are just doing it

There’s a rich history of technology businesses racing to get popular before lawmakers could get around to banning them.

Internet browsers using banned cryptography, e-commerce sites offering tax-free sales, Napster file-sharing, Uber ride-sharing, Airbnb room-sharing, YouTube, e-cigarettes — all businesses that chose to ask forgiveness rather than permission.

In each case, if they had asked for prior permission to operate, they’d have been denied. 

But because they didn’t, the services had time to become so popular that governments eventually chose to accommodate them, to one degree or another.

YouTube’s system for dealing with copyrighted material, for example, probably would not have been allowed by courts if they had asked permission to implement it before YouTube had already become popular.

It doesn’t always work, of course.

But even Napster, which lost its battle to facilitate peer-to-peer file sharing, paved the way for new ventures like iTunes and Spotify to run business models that would have been considered unfeasible — and possibly illegal — before file sharing got popular.

This is how we should be thinking about stablecoins, too.

If stablecoin issuers like Tether had asked the US government for permission to issue digital dollars without knowing the identity of any of their customers, they would undoubtedly have been denied — stablecoins go against every principle of modern banking law.

And yet, Tether is now one month away from celebrating its 10th anniversary.

It has a lot to celebrate, too: Assets under management are at an all-time high of $119 billion and the company earned $1.3 billion of operating profit in the second quarter of this year alone.

Better yet, Tether may now be operating with the implicit approval of the US government — its KYC regime of blacklisting addresses upon request of law enforcement appears to have grandfathered itself into tacit government acceptance.

That could still change, of course, because the novel form of KYC employed by stablecoin issuers has not been formally accepted by law and stablecoins are not yet as popular as YouTube.

To ensure that stablecoins go the way of YouTube and not Napster, issuers will have to successfully make the case that 1) stablecoins are useful and 2) blacklist-KYC is a good enough compromise with standard KYC law.

They still have a lot of work to do. 

This morning, for example, the Wall Street Journal reported that “Tether enables a parallel economy that operates beyond the reach of US law enforcement.” 

I guess that’s mostly true, but it’s also misleading because Tether itself is well within the reach of US law — most of its assets are held inside the US banking system and all of the US dollars it uses to create digital dollars are moved between regulated US banks.

Tether, therefore, operates at the pleasure of the US government, which could freeze those assets and/or tell banks to stop dealing moving dollars for Tether at any time.

Why they haven’t is a bit of a mystery.

I’d like to say it’s because the US is the home of the free and that the government respects our right to financial privacy, but there’s no real evidence of that — even when using physical cash, your right to financial privacy is limited to $10,000.

Some people think it’s because the US government recognizes that stablecoins extend the dollar’s dominance as the world’s reserve currency, but there’s not a lot of evidence for that either — that’s mostly just a talking point within crypto circles. 

Instead, I suspect that the US government just hasn’t gotten around to deciding what to do about digital dollars as of yet.

That may be for the best because stablecoin issuers have been using this time of benign neglect to 1) make themselves popular (total AUM of $170 billion is not nothing), 2) articulate an affirmative case for stablecoins (not just extending dollar dominance, but financial inclusion and modernized payment rails too) and 3) bolster its alternative form of KYC compliance (blacklisting accounts).

There’s evidence that they’ve made good progress.

Just this morning, Tether announced a new “financial crime unit” that will facilitate a “public-private collaboration to combat illicit activity associated with the use of USDT.”

And stablecoin talking points may be catching on: The team behind the Trump-backed DeFi project, World Liberty Financial, has touted its intention to help ensure the dominance of the US dollar by “spreading US-pegged stablecoins around the world.”

That won’t be enough for crypto’s critics, of course, who are unlikely to look past the Wall Street Journal’s assessment that Tether is “undermining America’s fight against arms dealers, sanctions busters and scammers.” 

But I think that misses two things:

1) Bank KYC is hardly foolproof: The Wall Street Journal also reported this week that as much as 80% of the billions of US dollars processed by banks in Iraq were untraceable, with “some portion of that amount” going secretly to Iranian-backed anti-US militias, and

2) New technologies often change the laws that would have precluded them.

YouTube’s current moderation system, which allows users to post copyrighted content while simultaneously giving copyright owners the means to police that content, probably would not have been strictly legal prior to the advent of user-generated social media.

Is that system so different from stablecoins allowing anyone to use dollars while giving law enforcement the means to police them?

The US government has not yet formally endorsed that compromise form of KYC, but stablecoins seem well on their way to joining the select group of technologies that changed the laws that they challenged. 

— Byron Gilliam

Catch your favorite newsletter author (Byron, of course!) IRL at Permissionless as he draws insights out of the greatest investment minds in the liquid token market. 

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