The era of confrontation has ended, and the era of dialogue has begun.

Written by: Sleepy.txt

Edited by: Jack

October 21, Washington D.C. The conference room at the Federal Reserve headquarters was filled with people who, just a few years ago, were seen as troublemakers in the financial system.

The founder of Chainlink, the president of Circle, the CFO of Coinbase, and the COO of BlackRock sat face to face with Federal Reserve Governor Christopher Waller to discuss stablecoins, tokenization, and AI payments.

This was the Federal Reserve's first payment innovation conference. The meeting was not open to the public but was live-streamed. The agenda included four topics: the integration of traditional finance and digital assets, the business models of stablecoins, the application of AI in payments, and tokenized products. Behind each topic lies a market worth trillions of dollars.

Waller opened with a statement, "This marks a new era for the Federal Reserve in the payment sector; the DeFi industry is no longer viewed as suspicious or ridiculed." This statement spread through the crypto community, and Bitcoin rose by 2% that day. In his opening remarks, Waller also said, "Payment innovation is developing rapidly, and the Federal Reserve needs to keep up."

The payment innovation conference featured four roundtable discussions, and Beating summarized the content. Below are the core topics and content from the conference:

The Federal Reserve's "Slimmed-Down Master Account"

The most important concept proposed by Waller is called the "Slimmed-Down Master Account."

The Federal Reserve's master account is a passport for banks to access the Federal Reserve payment system. With this account, banks can directly use payment rails like Fedwire and FedNow without going through intermediaries. However, the threshold for obtaining a master account is very high, and the approval process is lengthy, with many crypto companies applying for years without success.

Custodia Bank is a typical case. This Wyoming-based crypto bank began applying for a master account in 2020 but was delayed by the Federal Reserve for over two years, ultimately suing the Federal Reserve. Kraken faced similar issues.

Waller stated that many payment companies do not need all the functionalities of a master account. They do not need to borrow money from the Federal Reserve or require intraday overdrafts; they only need access to the payment system. Therefore, the Federal Reserve is studying a "slimmed-down" version to provide these companies with basic payment services while controlling risks.

Specifically, this account would not pay interest, might have a balance cap, cannot be overdrawn, and cannot be borrowed against, but its approval process would be much faster.

Federal Reserve Governor Waller

What does this proposal mean? Stablecoin issuers and crypto payment companies could directly access the Federal Reserve's payment system without relying on traditional banks.

This would significantly reduce costs and improve efficiency. More importantly, this is the first time the Federal Reserve has officially recognized these companies as legitimate financial institutions.

Dialogue 1: Traditional Finance Collides with Digital Ecosystem

The first discussion topic was "The Integration of Traditional Finance and Digital Asset Ecosystems." The moderator was Rebecca Rettig, Chief Legal Officer of Jito Labs, with Chainlink co-founder Sergey Nazarov, Lead Bank CEO Jackie Reses, Fireblocks CEO Michael Shaulov, and Jennifer Buck, Global Head of Funding Services and Depository Receipts at BNY Mellon, on stage.

From left to right: Rebecca Rettig, Chief Legal Officer of Jito Labs; Sergey Nazarov, co-founder of Chainlink; Jackie Reses, CEO of Lead Bank; Michael Shaulov, CEO of Fireblocks; Jennifer Buck, Global Head of Funding Services and Depository Receipts at BNY Mellon.

Interoperability is the Biggest Barrier to Integration

Chainlink co-founder Nazarov bluntly stated that the biggest issue now is interoperability. There is a lack of unified compliance standards, identity verification mechanisms, and accounting frameworks between assets on the blockchain and traditional financial systems. The decreasing cost of creating new chains is exacerbating the "fragmentation" of chains, making the need for unified standards more urgent.

He called on the Federal Reserve to ensure that payment systems can interoperate with stablecoins and tokenized deposits. He stated that the payment sector represents the buyers of the digital asset economy, and if the Federal Reserve can provide a clear framework for risk management, the U.S. can maintain its lead in global digital payment innovation.

He pointed out that it was unimaginable a year ago to discuss "regulated DeFi" at the Federal Reserve, which itself marks a positive trend. Nazarov predicted that in the next 2 to 5 years, a hybrid model would emerge: the "Regulated DeFi Variant," which automates compliance processes through smart contracts.

Traditional Banks are Not Ready; The Core Bottleneck is Cognition and Talent

Lead Bank CEO Reses believes that even with a blueprint for the integration of traditional finance and digital ecosystems, most banks are not prepared to handle this integration. Traditional banks lack wallet infrastructure, systems for handling cryptocurrency deposits and withdrawals, and most importantly, they lack "talent who understand blockchain products."

She further summarized the issue as a gap in cognition and capability, emphasizing that the biggest barrier is not the technology itself, but the "knowledge and execution capabilities of the core teams in banking financial services." These core teams lack the ability to understand and judge emerging blockchain products, leading them to be unsure of how to effectively regulate or supervise these new businesses.

This lack of preparation is particularly evident on the retail side. Reses mentioned that while the KYC systems for institutions are relatively mature, retail users still find it difficult to access these tools. This exposes an awkward reality: even if banks are willing to participate, their service capabilities are limited to a few institutional clients, and they are far from large-scale application.

The Industry Needs a Pragmatic Regulatory and Risk Control Framework

The discussion also touched on the issue of AI fraud, leading to a discussion on the "reversibility" of on-chain transactions. Traditional wire transfers can be reversed, but blockchain transactions are final. How to meet regulatory requirements for reversible processes while maintaining the finality of on-chain transactions is a severe challenge. Reses called for regulators to proceed "slowly and steadily," as "innovation is always great until your own family gets scammed."

Fireblocks CEO Michael Shaulov then directed the discussion towards deeper economic and regulatory issues. He pointed out that stablecoins could reshape the credit market, thereby affecting the Federal Reserve's monetary policy. He also highlighted a specific regulatory gray area: placing banks' "tokenized deposits" on public blockchains, where the banks' responsibilities are still unclear, which is a key issue currently hindering the advancement of bank projects. He called for further research on how digital assets change banks' balance sheets and the role of the Federal Reserve in this.

Finally, Jennifer Buck from BNY Mellon provided a "wish list," outlining four priorities that traditional banks hope regulators will address: ensuring the payment system operates 24/7, establishing technical standards, enhancing fraud detection, and creating liquidity and redemption frameworks for stablecoins and tokenized deposits.

Dialogue 2: The Troubles and Opportunities of Stablecoins

The second discussion focused on stablecoins. The moderator was Kyle Samani, co-founder of Multicoin Capital, with Paxos CEO Charles Cascarilla, Circle Chairman Heath Tarbert, Fifth Third Bank CEO Tim Spence, and DolarApp CEO Fernando Tress on stage.

From left to right: Kyle Samani, co-founder of Multicoin Capital; Charles Cascarilla, CEO of Paxos; Tim Spence, CEO of Fifth Third Bank; Fernando Tress, CEO of DolarApp; Heath Tarbert, Chairman of Circle.

Strong Demand and Use Cases for Compliant Stablecoins

In July, the U.S. passed the "GENIUS Act," requiring stablecoin issuers to hold 100% of high-quality reserve assets, primarily cash and short-term U.S. Treasury securities.

After the law took effect, the proportion of compliant stablecoins rose from less than 50% at the beginning of the year to 72%. Among them, Circle and Paxos were the biggest beneficiaries. USDC's circulation reached $65 billion in the second quarter of this year, accounting for 28% of the global market, with an annual growth rate exceeding 40%.

In terms of use cases, Spence provided the most pragmatic view on behalf of banks. He believes that the most powerful and direct use case for stablecoins is "cross-border payments," as it effectively addresses the pain points of traditional settlement delays and foreign exchange risks. In contrast, the programmability required by AI agents for trade is a more long-term future.

Fernando Tress from DolarApp also added from a Latin American perspective that for countries with unstable local currencies, stablecoins are not speculative tools but essential means of preserving value, reminding U.S.-centric decision-makers that the application scenarios for stablecoins are much broader than they imagine.

The Experience Bottleneck of "Dial-Up Internet"

Cascarilla pointed out the industry's biggest growth concern: user experience.

He compared the current DeFi and cryptocurrency landscape to early "dial-up internet," stating that DeFi and cryptocurrencies have not yet been sufficiently abstracted.

He believes that mass adoption will only occur when blockchain technology is well abstracted and becomes "invisible." "No one knows how a phone works… but everyone knows how to use it. Cryptocurrencies, blockchain, and stablecoins need to be like that."

Cascarilla praised companies like PayPal, believing that their integration of stablecoins into traditional finance is an early sign of this usability shift.

Threat to the Banking Credit System

Circle's Tarbert and Fifth Third Bank's Spence also participated in the discussion, representing the traditional banking perspective, which itself is a signal.

Spence first attempted to reshape the identity of banks, proposing to replace "TradFi" (traditional finance) with "ScaledFi" (scaled finance), stating that the "old" identity of banks is "the least interesting thing."

He also pointed out that stablecoins would not deplete banks' "capital," but would deplete "deposits." The real threat lies in the possibility that if stablecoins are allowed to pay interest (even disguised as "rewards" like Coinbase's USDC subsidies), it would pose a significant threat to the formation of bank credit.

The core function of banks is to absorb deposits and issue loans (i.e., credit creation). If stablecoins, with their flexibility and potential interest, siphon off a large amount of deposits, the lending capacity of banks will shrink, thereby threatening the entire economic credit system. This is similar to the impact that early money market mutual funds (MMMFs) had on the banking system.

Dialogue 3: AI Fantasies and Realities

The third discussion topic was AI. The moderator was Matt Marcus, CEO of Modern Treasury, with ARK Invest CEO Cathie Wood, Coinbase CFO Alesia Haas, Stripe's AI lead Emily Sands, and Richard Widmann, Web3 Strategy Lead at Google Cloud, on stage.

AI is Opening the Era of "Agent Commerce"

Cathie Wood predicted that AI-driven "agent payment systems," where AI transitions from "knowing" to "executing," will autonomously make financial decisions on behalf of users (such as paying bills, shopping, and investing). This will unleash tremendous productivity. She asserted, "We believe that with such breakthroughs and the release of productivity, actual GDP growth could accelerate to 7% or higher in the next five years."

ARK Invest CEO Cathie Wood

Additionally, Wood referred to AI and blockchain as the two most important platforms driving this wave of productivity. She reflected on U.S. regulation, suggesting that the early hostility towards blockchain turned out to be a blessing in disguise, forcing policymakers to rethink and ringing alarm bells for the U.S. to reclaim leadership in the "next generation of the internet."

Emily Sands from Stripe emphasized from a practical perspective that while use cases for AI agents in shopping (such as one-click checkout via ChatGPT) have emerged, mitigating fraud risk remains "one of the most pressing challenges." Merchants must clearly define how their systems interact with these AI agents to prevent new types of fraud.

In terms of enhancing financial efficiency, the effectiveness of AI is also remarkable. Alesia Haas from Coinbase stated that by the end of the year, half of their code is expected to be written by AI bots, nearly doubling their R&D manpower. In financial reconciliation, one person can complete the reconciliation of crypto transactions in half a day, while processing an equivalent amount of fiat transactions requires 15 people over three days, demonstrating how AI and crypto technology significantly reduce operational costs.

Stablecoins are the New Financial Infrastructure Needed by AI Agents

The second consensus of the discussion was that AI agents require a new, native financial tool, and stablecoins are a natural solution.

Richard Widmann from Google Cloud explained that AI agents cannot open traditional bank accounts like humans, but they can have crypto wallets. Stablecoins provide the perfect solution for this, as they are programmable and particularly suited for AI-driven automated microtransactions (e.g., payments of two cents) and machine-to-machine (M2M) settlements.

Alesia Haas from Coinbase added that the programmability of stablecoins, along with an increasingly clear regulatory environment, makes them an ideal choice for AI-driven transactions. The rapid monetization speed of AI companies (with ARR growth rates 3-4 times that of SaaS companies) also necessitates that payment infrastructure must integrate new payment methods like stablecoins.

At the same time, stablecoins and blockchain technology offer new anti-fraud tools, such as using the visibility of on-chain transactions to train AI fraud models, address whitelisting/blacklisting mechanisms, and the finality of transactions (merchants have no risk of chargebacks).

Dialogue 4: Everything on the Chain

The fourth discussion topic was tokenized products. The moderator was Colleen Sullivan, Head of Venture Capital at Brevan Howard Digital, with Franklin Templeton CEO Jenny Johnson, DRW CEO Don Wilson, BlackRock COO Rob Goldstein, and Kara Kennedy, Co-Head of JPMorgan Kinexys, on stage.

From left to right: Colleen Sullivan from BHD, Jenny Johnson, CEO of Franklin Templeton, Rob Goldstein, COO of BlackRock, Kara Kennedy, Co-Head of JPMorgan Kinexys.

Tokenization of Traditional Financial Assets is Just a Matter of Time

Participants unanimously agreed that asset tokenization is an irreversible trend. BlackRock COO Goldstein made the most direct statement: "It's not a question of if, but when." He pointed out that digital wallets currently hold about $4.5 trillion, and as investors can directly hold tokenized stocks, bonds, and funds through blockchain portfolios, this number will continue to rise.

Don Wilson from DRW predicted more specifically that within the next five years, every frequently traded financial asset will be traded on-chain. Jenny Johnson from Franklin Templeton likened this to historical technological revolutions, summarizing, "Technology adoption is always slower than people expect, and then suddenly it takes off."

Tokenization is not a distant vision but a practice that is happening now. Currently, traditional finance and digital assets are merging in both directions: traditional assets (such as stocks and government bonds) are being tokenized and used in DeFi, while digital assets (such as stablecoins and tokenized money market funds) are also integrating into traditional markets.

Institutions have been actively laying the groundwork. Johnson revealed that Franklin Templeton has launched a native on-chain money market fund (MMF) that allows for precise intra-day yield calculations down to the second. Kennedy introduced the progress of JPMorgan Kinexys, including using tokenized U.S. Treasuries for minute-level overnight repurchase transactions and launching a proof of concept for JPMD deposit tokens. Wilson also confirmed that DRW has been participating in on-chain U.S. Treasury repurchase transactions.

We Must Not Replicate the "Bad Practices" of Crypto Natives

Despite the promising outlook, traditional financial giants remain highly vigilant about risks. They emphasize that tokenized assets should not be interchangeable with stablecoins or deposit tokens, and the market must assess the collateral "discounts" of different assets based on credit quality, liquidity, and transparency.

Goldstein from BlackRock warned that many so-called "tokens" are actually complex "structured products," and not fully understanding these structures is dangerous.

Wilson from DRW sharply pointed out the serious issues exposed by the recent crypto market crash (on October 11): unreliable oracles and conflicts of interest where trading platforms profit by internally liquidating and shutting down user deposits.

He firmly stated that these are "bad practices" that traditional finance should not replicate before entering DeFi, and strict infrastructure oversight and market quality standards must be established first. Additionally, due to compliance (AML/KYC) requirements, regulated banks must use permissioned distributed ledgers (Permissioned DLT).

Who is Winning the Race for Digital Finance?

The signals from this conference were clear: the Federal Reserve no longer views the crypto industry as a threat but as a partner.

In the past year or two, global competition in digital currencies has intensified. The digital yuan has made rapid progress in cross-border payments, with transaction volumes reaching $870 billion in 2024. The EU's MiCA regulations have come into effect, and the crypto regulatory frameworks in Singapore and Hong Kong are also being refined. The U.S. is feeling the pressure.

However, U.S. policy is different; it does not promote a government-led central bank digital currency but embraces innovation from the private sector. The "Anti-CBDC Surveillance National Act" passed this year explicitly prohibits the Federal Reserve from issuing a digital dollar. The U.S. logic is to let companies like Circle and Coinbase issue stablecoins, and let BlackRock and JPMorgan handle tokenization, with the government only responsible for setting rules and regulation.

The most direct beneficiaries are compliant stablecoin issuers, with the valuations of Circle and Paxos rising significantly in recent months. Traditional financial institutions are also accelerating their layouts, with JPMorgan's JPM Coin processing over $300 billion in transactions. Citigroup and Wells Fargo are testing digital asset custody platforms.

Data shows that 46% of U.S. banks now offer cryptocurrency-related services to customers, up from just 18% three years ago. The market response has also been evident. Since the Federal Reserve signaled regulatory easing in April, the stablecoin market size has grown from over $200 billion at the beginning of the year to $307 billion.

This strategy is backed by deep political and economic considerations. Central bank digital currencies imply direct government monitoring of every transaction, which is difficult to accept in the political culture of the U.S. In contrast, privately-led stablecoins can maintain the global status of the dollar while avoiding controversies over excessive government power expansion.

However, this strategy also carries risks. Private stablecoin issuers may form new monopolies, and their collapse could trigger systemic risks. Finding a balance between encouraging innovation and preventing risks is a challenge faced by U.S. regulators.

In his closing remarks, Waller stated that consumers do not need to understand these technologies, but ensuring they are safe and efficient is everyone's responsibility. This statement may sound bureaucratic, but the message is clear: the Federal Reserve has decided to integrate the crypto industry into the mainstream financial system.

The conference did not release any policy documents or make any decisions. However, the signals it conveyed are more powerful than any official document. An era of dialogue has begun, and the era of confrontation has ended.

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