In a recent episode of the “Fintech Beat” podcast hosted by fintech guru Chris Brummer, listeners were treated to an intellectually rich conversation with Nic Carter, a partner at Castle Island Ventures and co-host of the “On the Brink With Castle Island” podcast. 

Brummer kicked off the illuminating chat by saying, “As a law professor, I want to get a sense of what philosophical moorings ground Nic's work as a crypto VC. And I want to get an overview of his latest research on stablecoins in emerging markets, and in this political season, his highly publicized research, drawing attention to what he describes as government efforts to suppress the crypto industry.” 

Carter, who studied philosophy before turning to venture capital, highlighted two seemingly opposing influences: American political philosophers Robert Nozick and John Rawls. "I'm going to pair two that are diametrically opposed in some ways,” Carter shared. “Nozick, the libertarian philosopher, and Rawls, who's kind of, I guess the latter-day progressive philosopher. I studied philosophy in school, actually thought about becoming an academic philosopher, believe it or not. The money wasn't there, so I went into crypto,” adding, “As a bitcoiner, I certainly have a lot of time for the Austrian school and the libertarian mindset."

Carter explained how he finds value in Rawls’ veil of ignorance approach, which emphasizes reasoning from an abstract perspective devoid of personal bias. "When we think about new foundational ways to organize society, that is what crypto is about, in theory."

Chris Brummer Learns About Choke Point 2.0: A Coordinated Crackdown?

Part of the episode’s focus was Carter’s work on “Choke Point 2.0,” a term he coined to describe what he sees as a coordinated effort by U.S. regulators to marginalize the crypto industry. Carter traced the origins of this term to Operation Choke Point, a controversial initiative under the President Barack Obama administration. He explained, "The thrust of it was at the time the [Department of Justice] and the [Federal Deposit Insurance Corporation] were discouraging banks from doing business with certain, I would say politically disfavored industries ... The problem that people had with it was kind of a lack of due process, a lack of transparency.”

Drawing parallels to recent developments, Carter observed that the post-FTX collapse era has seen a resurgence of such tactics. "In early '23, after the FTX collapse, I noticed that banks or entrepreneurs in our portfolio would tell us banks were de-risking them,"he noted. He described how the Federal Reserve and the FDIC appeared to discourage banks from serving crypto clients, citing a "verbal threshold" limiting crypto-related deposits to 15% of a bank’s portfolio. "This was obviously a problem for the likes of Silvergate and Signature,” Carter added, pointing to the collapse of these banks as evidence of the chilling effect on the crypto industry.

The lack of transparency in these measures raised serious concerns for Carter. "Was this done legitimately through a legislative process or ... was it too informal and arbitrary?" he asked. Chris Brummer echoed these sentiments, likening the issue to "soft law," where informal guidance skirts formal rulemaking processes.

Stablecoins and Emerging Markets: A Force for Financial Inclusion

The conversation shifted to Carter’s recent paper on stablecoins in emerging markets, sponsored by Visa Crypto. Carter’s enthusiasm was evident as he discussed the transformative potential of stablecoins. "What we see with stablecoins is most stablecoins reference the dollar ... but mostly they're issued outside the U.S.," he explained. He compared the rise of stablecoins to the emergence of eurodollars in the 20th century, describing them as a "global transactional network" that is increasingly used for cross-border payments and financial inclusion.

Carter’s study focused on five key emerging markets: Brazil, Indonesia, India, Nigeria, and Turkey. "We asked them what the heck are you doing with stablecoins?" he said, detailing use cases ranging from crypto trading to payroll. Carter said among his findings, 50% of respondents used stablecoins for trading crypto, 47% for saving money in dollars, and 34% for buying goods and services. "In Nigeria, the most common use case ... was saving. That was their primary stablecoin use case even above crypto trading," Carter highlighted.

Chris Brummer praised the study, pointing out its significance for policymakers in Washington. "It’s a story you hear lots of people trying to articulate. It’s amazing and frankly, a gift to have some hard data to help to back that up," he said.

Balancing Regulation and Innovation

A recurring theme throughout the episode was the tension between regulatory caution and the need to foster innovation. Carter argued for a more constructive regulatory approach, particularly for stablecoins. "I do believe there should be a federal pathway there. I think it would serve everybody to have federal regulation for stablecoins, and perhaps that will be a legislative outcome in the coming year.

“I think Washington would benefit from having more understanding of how these things operate," he added, warning against the unintended consequences of ceding leadership to jurisdictions like Singapore and the European Union.

At the same time, Carter acknowledged the legitimate concerns of foreign governments grappling with crypto dollarization. "If you are imprudent in terms of managing your currency ... you risk having this dollarization happen from beneath your feet," he observed. Stablecoins, he argued, offer a corrective force that incentivizes better fiscal management while empowering individuals with financial tools previously out of reach.

A Vision for the Future

As the episode drew to a close, Carter shared a powerful analogy: "Let's say Starlink really blankets the globe and brings in billions of new individuals because for the first time now they have internet. Stablecoins do that for finance." He envisioned a future in which stablecoins act as a "Starlink for finance," enabling frictionless cross-border transactions and financial inclusion on a global scale.

Brummer concluded with high praise for Carter’s work. "I commend you, Nic, for taking us on that journey," he said, inviting Carter back for future discussions.

The conversation between Chris Brummer and Nic Carter was a master class in exploring the intersection of philosophy, policy, and financial technology. From the philosophical moorings of crypto to the regulatory challenges and transformative potential of stablecoins, the episode offered profound insights into the future of finance. As Carter aptly put it, "What happens in Washington matters, not just to U.S. individuals, but now it's a global stakeholder audience."

For those eager to understand the dynamics shaping the fintech landscape, this episode of Chris Brummer’s “Fintech Beat” is not to be missed.