How do you rate a stablecoin? | Crypto Clarified

Speaker A: Hello and welcome back to Crypto Clarify. My name is Vinh Tran, Associate Director of business development at WisdomTree Digital Assets.

Speaker B: And I'm Davila Szymenskite and I'm responsible for digital asset research at WisdomTree Europe.

Speaker A: Today we're joined by Benjamin Levitt, co founder and CEO at Blue Chip, a stablecoins rating agency. We're going to be talking about all things stablecoin rating safety and how stablecoins will impact industries across crypto and traditional finance.

Speaker C: Hello and welcome.

Speaker A: Ben. Uh, thank you for joining us today on the podcast.

Speaker C: Thanks so much for having me.

Speaker A: Yeah, absolutely. Um, and talk about unconventional starts to crypto. I know your background is a professional poker player. We are coming off a, uh, stream of conferences where two weeks ago I had the pleasure of being in Vegas for BTC Vegas, where I entered in a poker tournament myself, uh, that was sponsored by the event and I finished seventh out of 40th, uh, but nowhere near as good as you, I'm sure. So would love to know more about your background, how you got your start into crypto, how did that build from your professional poker career? And yeah, let's, let's get it going for sure.

Speaker C: I mean, uh, the, the, my poke career like ended 10 years ago pretty much before I entered crypto. Um, but it was also the gateway into crypto for me. So I, yeah, started um, learning and playing poker right after high school and actually moved on to doing it professionally. And it was exciting. Kind of, uh, learning a lot about risk management. It's a very mathematical game. You really just have to focus on, on probability math. There's really not a lot of room for emotion. So quite similar to trading, I would say. And um, yeah, basically through a poker site that allowed players to basically, um, you know, withdraw their winnings in, in btc. I discovered BTC and then I, I just kind of got hooked on that and, and on the idea of having, yeah, a decentralized currency was very new, very interesting. And I think generally as, as a poker player kind of being open to more unconventional things, at least at that time I was very intrigued by, by the idea and kind of learned a lot about uh, BTC as or as soon and as much as possible. And then kind of started, yeah, really kind of tuning down my time playing poker and only focusing on crypto. And yeah, now I'm like, uh, almost 10 years in, ah, the space started off with sort of holding educational courses in Austria, Germany and Switzerland, um, um, about kind of the basics of Bitcoin and Ethereum uh, I felt that education is something really valuable, um, and that kind of people are just communicating with each other to learn more. And um, yeah, that also was interesting to see. When the market went up in 2017, um, people were more interested in it. And then when the first sort of more major mainstream bear market hit then people also got less interested in uh, these educational topics. I think that's also great that we're also also now seeing less variance in that. It's, it's more general uh, interest there. But um, so back then I, I then started an E commerce business which had nothing to do with crypto but taught me a lot about business. And, and then four years ago after the Terra Luna crash when um, yeah, ah, a stable coin combined with its governance token reached a market cap of around 60 billion USD and then crashed within a few weeks. Um, my co founders and I had the idea to uh, build a rating agency for stablecoins and that's when blue chip started.

Speaker A: Amazing, amazing. And obviously it's been such an unconventional path for you where you've gone from poker to all these different businesses and then now you're doing stable coins. What drew you to stablecoins from the shift? Because within crypto obviously there's so many different narratives obviously after the crash of Terra, uh, and ftx you mentioned um, why stablecoins and why now?

Speaker C: Yeah, I think it was really maybe this, maybe similar motivation that got me into also holding these courses. I just feel like um, providing um, some guidance, some framework, some conversation is just helpful for the space. And I see and saw and still obviously see uh so much future and potential for the space. I still think we're just in the beginning, um, and I think ratings are an essential piece for sort of self regulation of the industry and some sort of just maturity of the industry. And so I realized okay, stablecoins are something that many people in the world use and need. Especially Terra Luna um, was heavily used in high inflation countries. Obviously a super attractive option to have the dollar or the euro on chain and just by having an Internet access when you live in 2 or 300% inflation. So it makes sense that stablecoins are very attractive and there are many different use cases as well. But uh, seeing that so many people also got hurt by this it felt to me like it really provides a lot of value to, to, to the ecosystem. And so yeah, this, this is kind of what drew me into stablecoin specifically.

Speaker B: And how do you rate stablecoins? Like what does blue chip look at to assess the Quality of a stablecoin?

Speaker C: Yeah, so we um, give ratings from A plus to F. Um, A plus obviously, meaning that we think it's very, very unlikely that they would uh, not survive a bank run. But we so far have not given out any A pluses. Um, and then uh, for Fs, we actually gave out four Fs so far. And um, three out of the four Fs have de packed some point after our rating. And um, these letter grades are freely accessible to all users. That's important to us that anyone in the world, especially people living in high inflation, can just briefly go on blue chip.org and check the grades. Um, but then we have Blue Chip Pro for the full reports, the scoring guidelines and all the detailed information, which is kind of more of a due diligence process that is also mainly relevant to institutions.

Speaker B: And do you have different classification or different criteria for stablecoins that are, for example Genius act compliant to the ones that are not? For the ones that are compliant with the European regulations, the ones that are not. How do you think about regulation and stablecoins?

Speaker C: So regulatory frameworks, um, play an important role. When we evaluate a stablecoin, it gives us some better idea of obviously how to ah, stablecoin has, has to be set up or is set up. Uh, but we created our own framework and it aligns in some cases with Genius or with mica. With mica, but it's not directly, you know, um, an essential piece. Also an unregulated stablecoin or a decentralized stablecoin can receive, um, a very strong grade. So we evaluated, it's part of the general process to know if a stablecoin is regulated or not. But we have some own guidelines that are also not required in all the regulatory frameworks. And in general, um, try to apply smidge and then kind of see what happens. It's really like an objective framework that anyone can apply. So there's no room for emotions or subjectivity.

Speaker A: So on that objectivity then are you guys typically going to these different stablecoin issuers and offering a rating like the traditional companies like Moody's and S&Ps of the world or how does that process work for, for you guys to uh, then make these ratings happen?

Speaker C: Yeah, it's, it's really mixed. Sometimes we approach the issuer, sometimes the issuer approaches us and then we, we generally, you know, sometimes all the information is publicly available and, and we would not really need to engage with the issuer. So sometimes we need to um, strongly engage, get information potentially sign NDAs and just um, make sure that we have all the information that is there. But obviously in some cases there just isn't enough information to actually um, give a statement on all topics or on all parameters. And if there's missing um, information then that just counts as if it wouldn't exist. Because generally um, we at Bluetooth believe that all stablecoins should be as transparent as possible and also as open as possible on their reserves, their governance systems and everything. Um, and so yeah, we kind of also try to push more safety and transparency by having the kind of blue chip standard or these ratings there so that um, we ultimately can give a good grade. But obviously there are issues as well that are just not getting good grades, which is kind of the point of a rating agency. If all stablecoins would be A pluses then it probably wouldn't make sense to have ratings in the first place. But um, in general we try to make sure that we also work with the issuer towards a safer rating if that's possible and if that's also desired by the issuer. So um, if we tell them that they can do certain things uh, to improve their grade from a B plus to an A minus, for example, um, then we've also had this before where we collaborated with uh, an issuer to make that possible.

Speaker A: Got it, got it. And I think it's as timely as ever. And I know we were discussing this before but we're seeing so many new stablecoins come to market um, globally.

Speaker C: Right?

Speaker A: A lot of us, uh, denominated stablecoins and other global currencies. Um, a kind of a two part question, but why do you think that is, uh, in terms of this stablecoin summer that we saw last year and what purpose do you think that serves in the future? Like how do you see that developing?

Speaker C: So yeah, I think stablecoins are seeing such growth because there are just so many use cases that they're just really better than existing systems. They provide great uh, infrastructure for remittances, payments, making them cheaper, faster. They're obviously a huge game changer for people living in high inflation. So this is slowly but surely picking up. Um, also a lot of businesses are integrated, integrating them, um, you know, really providing also internal processes that are, that haven't been possible before. Large companies are using stablecoins um, to you know, just make their operations uh, cheaper and quicker. So I just truly think that this is just a process that we're still in the beginning of. I think stablecoins will be equally uh, as large topic in the next five years as they are today. I think they're just going to keep growing. Uh, at some point we'll reach some sort of peak or plateau where it's kind of there, right, where everyone just accepts that they exist and it's just part of our everyday life. And not just kind of more in the, in the crypto bubble. But we're already seeing a lot of traditional finance companies, banks getting involved and using stablecoins. Um, one project that we for example, follow, um, in the eu, um, I'm based in Austria myself, um, is Kivalis. And it's, it's a European stablecoin or rather a Euro stablecoin that is issued by uh, 12 banks right now. By the time they're launching, there will be many more banks being part of that. And so we see kind of the largest EU banks coming together to launch €1 stablecoin. And that's just very interesting and it's something that we, you know, um, couldn't really have imagined a few years ago or just wouldn't expect when this would happen. And, and since we're seeing this already now, um, I'm truly, um, excited about the, about the next years in the stablecoin space. Yeah, yeah, absolutely.

Speaker A: And I think you're seeing a lot of similar developments here in the US as well. Um, so to kind of build on that point, right, you mentioned, um, institutional players coming into the market to build out these stablecoins. You have legacy stablecoin issuers as well. Uh, and you have so many in between. Right. How do you, we as an industry differentiate between these types of stablecoins, whether it's use case, whether it is, uh, currency. But how do you see that playing out? Because there's so many.

Speaker C: Right.

Speaker A: How do you think that develops?

Speaker C: Yeah, that's a very good point. I mean part of that, I would say are actually ratings when it just comes to safety, because I just don't see all these different types of stablecoins also being safe and being like um, business models that actually work and having governance systems that are safe or will hold potentially. Right. So that's one thing, uh, a way to differentiate is, uh, looking at the safety itself. Um, but then of course, depending on if a stablecoin is yield bearing or not, if a stablecoin, um, you know, which blockchain they're deployed on or you know, also where you can hold a certain stablecoin, so there, there will be a certain group of people that maybe will prefer to hold their stablecoins only in a bank. Right. So then this stablecoin would need to be integrated with the bank uh, and supported by that. Otherwise um, there will be people that prefer to use stablecoins in the DeFi ecosystem and do lending and different other options. So they will have very different desires for stablecoins and certain use cases. So um, uh we as a rating agency focus on the safety aspect but uh, yeah I think we'll see more and more stablecoins. We'll see more stablecoin diversification um, as well. And with that also yeah there will be um, more questions of this kind of um, when and which stablecoin uh, should I really use for a certain M thing that I want to do today on a pay or buy today.

Speaker B: Yeah, you made a number of references to safety. So what are the key risks that most individuals do not even appreciate about stablecoins? Like what makes stablecoins riskier?

Speaker C: I truly think the kind of uh, um, opaqueness of some of the governance systems and the management teams behind stablecoins is really what people don't look into, don't understand or just don't know. And these are really the key risks. Also with Terra Luna people didn't really understand the stability mechanism and what even an algorithmic stablecoin would be. And they didn't even really look at it. They just looked at the market cap and saw that it's big and it's being used. And that's why for example market cap also is not a factor anywhere in the Smith trading framework. Uh, a 10 million euro dollar market um cap stablecoin can be much safer than a 10 billion dollar market cap stablecoin. So it's really about the structure and also uh, regulation in some cases and the management team and systems that are in place uh, to safeguard the stablecoin and make sure that not just a few people can really turn off a stablecoin uh too easily um, or have negative incentives. And these are a lot of things that as a general user you would just never really see.

Speaker B: And are ah, certain blockchains more suitable for stablecoins than the others? For example when I talk to investors all across Europe I highlight to them that Ethereum M has a big market share of stablecoins. So is there anything that makes Ethereum blockchain more suitable for stablecoins or do you see other blockchains catching up and potentially taking over?

Speaker C: Yeah, I think that there are two considerations for the underlying blockchains um, or two main ones. One is the cost, like where is it the cheapest to transact stablecoins and the other one again is the safety. Right. So um, for Ethereum it's kind of the largest decentralized network um, for the stablecoin users that we're seeing. And so when you really care about having the safest possible transaction, um, Ethereum should probably be your choice. And that's why we're seeing kind of almost 70% of stablecoin usage on there. Uh, but then there are also people using Tron because it's very cheap, um, that just want to make sure to have some sort of micropayments, um, infrastructure, uh, or kind of tool for them that they can use to make a lot of smaller transactions maybe, or buy things that are maybe less pricey. If it's like $1 that you want to spend, um, you really care a lot about the fees. Whereas if you transact um, a million dollars then safety um, might be more relevant to you.

Speaker B: And you talk about people making payments for using stablecoins but now there is more and more talk about AI agents doing payments uh, via stablecoin. Rails, what do you think about that and how will stablecoin ecosystem evolve to make AI economy more suitable?

Speaker C: I also truly think that the kind of agentic e commerce space will heavily rely on stablecoins. I think they'll just have wallets and, and not directly be linked to your bank account and then um, having a wallet using stablecoins would be the way to go here. So I definitely think this, this whole agentic space will again provide a very large push um, in stablecoin volume and market cap. So I agree with these people that are, that are also of that opinion for sure.

Speaker A: And you mentioned a few different use cases earlier. Remittances, uh, payments as another one that

Speaker C: we just talked about.

Speaker A: What other use cases are you seeing in your space for these different types of stable coins? And along those lines, what industries do you think will be impacted first from the adoption of stablecoins?

Speaker C: I mean the savings aspect is something really interesting. Obviously if there is a way to earn some yield, whether it be some stablecoins that are also backed by potentially tokenized real world assets, this is um, an area that I think will be growing a lot as well. Um, if you have the option to hold your savings um, in a stablecoin that is kind of inflation proof in a way that's obviously a huge game changer for um, you know, regular, regular everyday users. So um, I think this is a use case uh, that will be very relevant and in the Future. I think people are seeing that inflation is an issue in general more and more in the last years. I think like 10 years ago it was less of a topic as 5 years ago inflation rates were higher. Also in 2023 we saw a lot of or large increases in inflation rate and people are feeling that of course. So I think um, um, the savings kind uh of era will potentially change and be revolutionized by stablecoins and certain designs. And um, yeah when we look at industries I think like the main industry, the kind of first large ah change there will be the banking industry. Um, I do think banks are more and more integrating and also truly understanding the importance of stablecoins and how they can improve their offerings, their businesses and their operations. So um, by projects like the uh, one I mentioned before in the EU and many other ones around the world, um, we heavily see kind of the banking industry really making big, big changes um, by launching or integrating uh, stablecoins.

Speaker A: Amazing. And do you think the European regulatory framework is set up for the success of this? And how does that differentiate what you see in the us?

Speaker C: I think uh, both the genius and micro regulation are good starts, kind of good kind of kickoffs. They still will um, evolve and will kind of um, adapt uh, alongside all the new stablecoins design designs will see I think a large topic is obviously um, yield. Right. So um, both the genius act and the micro regulation are not um, making it um, making, making yield stable coins a thing. And so this is something where I do think we'll see some changes and where I don't think we've kind of found the perfect solution yet. Also when we look at decentralized stablecoins this is not really a part of mica. Um, it's mainly focused on these large fiat based stablecoins that we're currently seeing which obviously have the largest uh, market share as well. Um, but I strongly believe that decentralized stablecoins and we've rated some decentralized stablecoins also very uh, uh safe. So I do think that this is a space that will be growing and I do think that this is also an area where the regulatory frameworks will adapt and kind of have to adapt.

Speaker A: Yeah. So outside of regulation then obviously I think stablecoins have been adopted pretty broadly across crypto natives and you're seeing a lot more traditional institutional players come into market talking about broader retail access and adoption. What other barriers are you seeing?

Speaker C: I mean on, on the topic of decentralized stablecoins, actually um, the, the regulatory frameworks they you know, they, they have some very specific um, guidelines and, and that's, that's also something where decentralized stablecoins are kind of being pushed. Right, right. Because people are seeing, well if I launch a decentralized stablecoin nowadays, I can actually, you know, um, build something that is not impacted by some regulatory frameworks and I can actually build a design that, build in a design that I think is best or that I want uh, for my users or in general to be there and to deploy. And so um, when we look at barriers, I also think regulation kind uh, of comes in here, um, in the sense that there are a lot of businesses that maybe have used stablecoins in certain ways, um, which may not be possible yet, which again would be a yield bearing. I do think it's a topic where um, we kind of have to ask ourselves does it make sense that stablecoin issuers are making this um, kind of risk free money, uh, while users are kind of just being able to, to use or kind of receive the digital copy of a dollar on chain? Right. So um, the more and more people will get kind of more familiar with being on chain or using the blockchain. I think people will want to have more ways to also gain more yield and use DEFI products. And this is, this is a barrier that we kind of have to overcome that people are also, yeah, getting access to yield through, for certain products and also doing that in a safe environment and also making sure that people know about this and that the people, yeah, kind of really can learn about defi really. I think, I think that's really a big barrier where most of my friends would probably not uh, totally understand, you know, know how, how to actually be a part of the, of the DEFI ecosystem that, that the crypto world is actually using and that's creating a lot of uh, opportunities and value as well. And I think defi is also really just growing and, and also a huge playground for, for stable coins and a huge network.

Speaker B: Let's go back to blue chip. Like what does success look like for you over the next 12 to 18 months? What do you hope to happen and where uh, do you hope to be involved over the next year, year and

Speaker C: a half with blue chip? We've kind of always waited for this moment that ratings or that stablecoins are growing and therefore ratings become more relevant. And we do see this already, um, especially the traditional finance companies are very um, interested and truly understand ratings and the importance of having these guidelines and these frameworks in place. And so I see and also hope that the stablecoin space is just um, maturing more and that ratings really become a standard. And that's also what we are building at blue chip to make sure that this standard can align well with the regulatory frameworks that are in place and also um, that they provide true value like we see in the, in the banking um, credit rating world um, ratings are an essential piece and I do think the stablecoin space are, is going into that direction um as well. If that's already happening in the 12 to next 12 to 18 months, that's, that's kind of the big question. But it's, but it's already starting um, I think like the big click could come when um, the regulator would require stable uh, conditions to get a rating like um, we see in the banking credit rating world. But even without that um, this self regulation of the industry is so important and the more stable coins we see. Vin, to your point earlier, the more different stablecoins that we see in the market, the more and more uh, people will be looking at differentiators. And if you have 30 micro um, regulated stablecoins in the market or 30 genius act um regular stable coins out there, you will want to understand the differences. And so um, as we're seeing more companies issuing stablecoins and more stable coins in general coming into the market, um, that's where we really want to focus on the next one and a half years with blue chip to provide that independent source of truth in a way and provide that differentiator.

Speaker B: Independent source of truth is of key importance in every aspect of life. And if blue chip succeeds and um, grows beyond your expectations, what impact do you think it will have on the whole stablecoin ecosystem?

Speaker C: I think that stablecoin issues, if blue chips um, succeeds in the way we imagine will be way more open to being more transparent and also having standards that are maybe beyond what's needed. I really think as an issuer you have a lot of responsibility um, managing savings, um, of people managing um, a uh large ah treasury and and yeah just providing a safe transparent product is really the most important thing here. Uh, the damage that the deep packs and obviously the biggest one with Terra Luna has done uh, was immense. And so that's really what we want to prevent with bluechip and also kind of push for issuers to really take very seriously and make sure that for them a uh, safe blue chip grade is of big importance and to kind

Speaker A: of add on that as an independent source of truth. Do you see we talked about decentralized stablecoins versus now more of the banking stablecoins tied to banks. Do you think these two types of stable coins can exist and can coexist?

Speaker C: Yeah, I definitely think they can and will coexist. Depending on a user's preference, they will prefer one of the other. There will be people that would potentially never touch a stablecoin issued by banks and then the other way around as well. So I think uh, both designs um, make sense if set up safely for sure.

Speaker A: Yeah. And then this is a little harder and more I guess, forward thinking in the future kind of going back to Davili's point. But are there any trends within stablecoins that you think people aren't paying enough attention to?

Speaker C: I think the biggest trend that I would mention here is really uh, the tokenization of assets and that being a part of stablecoin, uh, backings really. So I think the fact that Larry Fink is saying everything will be tokenized, uh, shows uh, where the space is going to. And having tokenized uh, real world assets like real estate and stocks and gold in your stablecoins backing rather than maybe just Treasuries, um, of your currency is a huge uh, trend in my opinion that we'll see when we really think about having a stablecoin that is more inflation proof than it is now. Because obviously now um, having a dollar or eurobaked stablecoin is just as inflationary as, as your fiat currency. So I um, really think that this trend will be the, the next big thing that I'm, I'm potentially or I'm personally looking uh, forward to because I truly think uh, it provides just so much value to be able to, to also send tokenized real assets um, through the world pretty much right on 24 7, um, with very low fees. That has not been possible with real estate before. Right. So having that in a form of a stablecoin is really um, exciting. And I think this is a trend that we'll be definitely seeing in the next, let's say five years.

Speaker A: Got it. And I couldn't agree more. We're very focused on at Wisdom street, particularly in the US is what you mentioned, the tokenization of different types of assets. And we see different types coming on chain every day, from private credit to real estate. And I think the most uh, interesting dynamic is obviously the growth of both. And it seems like a very parallel track right. Where you see all these different types of assets go on chain and at the same time you're seeing the stablecoin growth, um, obviously Being on chain, can you connect the dots for us and paint a picture of how that looks from an interoperable world, Right, where you have all these different assets on chain

Speaker C: and then you have all these different stable coins on chain.

Speaker A: How does that change how users interact, how users transact?

Speaker C: Yeah, I think both are really uh, well um, sort of working together and compatible. So you can have a stablecoin that is backed by a variety of real uh, world assets. Um, you have to have a mechanism that's obviously in place to make sure that that is managed properly so that the stablecoin uh, can maintain its peg and stability. But generally speaking it really allows us to be able to have uh, first of all potentially savings account that is um, very easy to manage and much more inflation proof or potentially appreciates uh, value um, over time. And so I do think we could kind of live in a world or kind of to paint this picture where um, you know, if you're receiving your salary you would actually not have to kind of invest it or save it in a certain way and also have to become a professional investor in a way you could just uh, you know, just save your money as many recommend and then actually also be able to buy somewhat of the same things that you could do today like in 10 years. So that's kind of, I think uh, there would be a big win for society if people would not have to care about how they actually then invest their salary after they're maybe working in a completely different job that has nothing to do uh, with investing and just having your currency actually be more inflation proof and maintaining the purchasing power uh, over many years is something that I think this um, interoperability could allow

Speaker B: you highlight. Very interesting point and actually as I was listening to you speak, I was thinking if stablecoins grow to the scale that they are forecasted to grow, do you think that most stablecoin users will realize that they're using something that's built on blockchain or will they become just as standard as currently, uh, credit card payments or cash payments are. And just of the thing that people stop worrying about how they are actually operating.

Speaker C: Yes, success for stablecoins probably really looks like people wouldn't really notice uh, that they're using any different technology. They maybe just use their phone or a card to pay somewhere or safe and that's pretty much it. So yeah, I agree that um, the UI is really everything for adoption. And yeah, same as today as we also are using our phones and Internet, um, and websites, uh, without really understanding the technology behind it. Uh, for most people, um, I think the same, uh, will be the case for stablecoins. But still, um, having a better understanding and being a more dedicated user can allow you to potentially use defi or tools that allow you to earn more or to make more of this technology in a way. But yeah, true worldwide adoption will probably rely on that not being the case.

Speaker B: And I think this is a brilliant point to close on. Education is key if you want to make the most out of the items that are in existence and the items that are being developed, then thank you so much for brilliant discussion, Ben. It was really, really insightful.

Speaker C: Thanks so much as well.

Speaker B: To clarify, the views and opinions expressed in this podcast are those of Wisdom Tree and Blue Chip and are subject to change. Anything we present in this podcast is not intended to be relied upon as a podcast research nor as investment or tax advice. The information and opinions expressed in this podcast podcast are not a recommendation, offer or solicitation to buy or sell any securities, and reliance upon them is at the sole discretion of the listener. Please remember, past performance is no indication of future results.