Haonan Li on How Codex is Taking Over The $7 Trillion FX Market

In my view, the holy grail in stable coins is to build the FX facility that is the globally dominant stable coin FX facility, and liquidity begets liquidity.

There's an entire world built around these stable coins. There are financial mechanisms, money markets, yield sources, all of these things that are built around stable coins.

I think I'd actually love to explore it from both lenses. Why don't we start with the crypto side?

Welcome back to another episode of Stabled Up, our premier weekly show covering the ins and outs of digital dollars, stable coins, and the future of decentralized finance. The show is made possible by FRA, powering the financial engine of the internet, powering FRXUSD, and genius compliance stable coins. This is the stable coin super cycle made possible by FRA.

Hanan is here for our stable coin segment sponsored by FRA. Our friends over at FRA are doing great work, genius compliance stable coins, and recently just had another $50 million partner get announced and join Fracknet. So it is our pleasure to welcome Hanan because we've got a lot to talk about in the stable coin world.

Obviously the Clarity Act is getting held up because banks and stable coin issuers can't figure out where to put the yield. Stablecoin FX is getting a lot more traction as of late. How are you doing?

I'm good. Robbie, I hear you're doing better though. You're down south up north here. I was just telling you, man, it's 25 degrees here. So I am in Florida, but it's Man, I'm trying my best to stay warm.

What have you been up to since Argentina?

We've been head down building the business. Lots of exciting things going on at Codex. We hit a billion plus in run rate volumes. We're profitable on a net revenue basis. Things are looking good and we're very happy.

For anyone who didn't get a chance to see that segment, give us a bit of an explainer on Codex. Obviously, you guys are in the world of stable coins, particularly stable coin forex, which is a very there's a lot to unpack in that regard as well, but yeah, give us a sense of how you've been able to generate up to a billion dollars of volume this far.

Codex is the first stablecoin FX chain and we're built to make currency conversions to and from fiat cheap, instant, and always on.

The reason why that's so important is because despite stable coins growing by almost a hundred billion last year, most of FX today in stable coin land is done in a traditional way. It's slow and expensive and it's holding back the growth of stable coins.

What we want to do is we want to bring that activity onchain in a cryptonative way and we think this will unblock one of the key blockers that's holding back stablecoin growth and so far it seems like we're right.

One of the examples that you had shared with us back then was take the example of third party currency to third party currency almost like a like you know right now I believe if I'm remembering correctly a lot of the forex and and US a lot of the the interchange between countries currencies abroad has to flow through the dollar there's no liquid markets between some of these third world nations and a lot of their currencies, but Forex is one of the most liquid industries out there.

If Forex is so liquid, why aren't we seeing more third world currency to third world currency flows?

I think to separate out the issues here, I think first let's discuss like what traditional FX looks like. Traditional FX is a very hierarchical system, right? Originally there were these problems with settlement risk and so they came up with institutions like CLS that solve that settlement risk.

CLS only wants to deal with so many people at a time and so only that set of banks has actually direct access to that market and then everybody else has to go through these banks. So you get these tiers of access and each tier of access adds fees.

If you're on off-ramp in some country that's not very prominent, you're probably not at the very top of that hierarchy. You are suffering from sort of multiple layers of these types of fees. That's what's happening today when somebody is exchanging local fiat into stable coins. It should be no surprise that it's expensive.

Why does this hierarchy even exist? It exists because there's a settlement risk problem. Basically, if guy sends A sends B money, B might not have sent A money yet. You don't you have no way of knowing for sure that's happened unless you have an intermediary.

Remember in crypto we don't have that problem and in fact if you were to design the effect system from scratch today you wouldn't need something like a CLS because you'd be on crypto rails now. That is sort of the first principles advantage right you you don't need this hierarchy you don't need to solve the settlement risk problem and so you can flatten it and so this can create much better economics for everybody involved and cheaper FX for everybody that's kind of the the big picture of what's going on.

On the specific dollar point, it's true most traditional FX goes through the dollar. It could emerge to be the similar case in stable coins as well, but that doesn't delete the advantages as well as the efficiencies here. These are maybe a little separate.

As we're thinking through this, like you're saying, flattening the hierarchal structure that we have out there, we don't need an intermediary. Enter codeex to essentially solve what would previously be done by intermediaries you guys are enabling through some peer-to-peer connections.

Can you give me a sense of who are your current partners and who is doing the most of the volume on codeex right is it I take it it's probably not retail right it's probably at you know some sort of institutional level whether that's mostly cryptonative or it's mostly you know legacy finance who who are the primary players that are currently doing most of the volume on on codeex today?

It's primarily today I would think of it as like fintexs and PSPs. Think of them as like bundlers of underlying flows. We're starting to see companies directly want to do this as well because who doesn't want cheaper and faster conversions.

That's maybe the demand side of the business, which is pretty easy to think about from the customer's perspective. They have fiat, they want stable coins, they want it really cheap. Or maybe the other way around or you know between two stable coins whatever right anything to anything is the new slogan that we're coming up with.

They want anything to anything and they don't really care what's going on in background. They don't care about CLS hierarchy blah blah blah. This is all babble. Who gives a.

That's the demand side. On the supply side, what we're going to spin be spinning up soon are these onchain pools that anybody can participate in. What can you do? You can stake value in there and you can make money.

Crucially, this is not a DeFi Ponzi. It's not like you stake a DEX token to receive liquidity mining of the token of the DEX that then gets reaped, you know, 12 different ways and some weird thing, very complicated. It's very simple. The money you're making is from the customer who wants to pay a fee to get his conversion done. That's it.

We're very excited about this because this is the great in my view the holy grail in stable coins which is build the FX facility that is the globally dominant stable coin FX facility and liquidity begets liquidity.

I think this is the crucial primitive that's missing in stable coins today and what will determine the winner in this next 5 10 years.

We may hop back and forth between the the traditional legacy you know stable coin or or FX stack and and back just to make sure we really wrap our heads around it here, right? Where does most of the volume today happen in the FX market? Is it it's like it there's some portion of venues, right? And we're we're looking to to take that essentially vampire attack it put it on codeex.

That's right. Maybe I would put it less aggressively but I think like you know there are massive volumes being done for like dollar euro right right to me that's not particularly interesting we'll do that business if we need to but you know it's pretty efficient where I think it's most interesting is where one leg is maybe in the developing world let's say LAM or Southeast Asia I think there the inefficiencies are extremely high and there we can we can very much offer a much better experience.

I think these things will start small. FX markets are very large as you say like you know billion sounds great but it's a drop in the bucket in the overall FX market. To me that means that it's a much larger pie for us to grow into. This is truly a massive addressable TAM.

If we're sober about it I think we could talk about it as like the addressable TAM today for stable coins is likely in these kind of corridors where one side has an emerging market need. This is partly why I think if you see stablecoin teams you know spend most of their time in New York and spend most of their time in Europe, you should be a little skeptical like what's really going on there? What are they actually doing?

Why does CLA need a stable coin? Not to pick on anybody in particular, but why does a why does develop fintech necessarily need a stable coin? These are these are questions I think folks should be asking.

From your perspective, why does CLA like we we've been, you know, we've been proponents of like pretty much anyone with distribution can launch a stable coin and they they probably won't be the issuer themselves. Maybe they'll have, you know, an issuing partner or some infrastructure partner that enables their stable coin.

Uber, Airbnb, like all of these guys have the distribution where whether it's for a loyalty program or if it's just to, you know, earn the interest income themselves rather than having money floating out there and, you know, giving it to the bank getting you know, pennies on the dollar, they could be taking the interest in their own hands. Is that the primary value proposition for like the CLA stable coins of the world or is there is there more to this picture?

I think the primary value proposition of deals like that is hype. I think the primary value proposition of that is well look like tether is such a fantastic business right? It's enormously profitable very few people. What if we what if we could create another tether?

The problem may be that you cannot create another tether. Some people are going to realize that. But people are going to try. That's for sure.

There are two it cuts down on two pieces, right? First piece is well if the fintech holds the balances themselves then a stable coin is no no better than a money market money market mutual fund or like rolling commercial paper or like you know reverse repo themselves which like if you're of size obviously you have some guy doing that so then the question is you need other people to hold it right like why are other people holding it do you want to hold CLA stablecoin Robbie I don't use CLA very often if I did and I got some sort of rewards or benefits or special VIP access somewhere. I guess maybe I would consider it.

I would need some pretty good assurances to to know that a a dollar here is a dollar there. You know what I mean?

I think beware the type of thing where it's like, well, that could make sense for somebody else. Let me ask you this, Robbie. How would you like to do transactions for cheaper and faster?

That's a no-brainer. So that I like to bet on that kind of thing, right? Let's not do like cartwheels and somersaults in our brains, right? Let's do the stuff that, you know, really moves the needle.

Anything to anything is primarily going to be stable coin, stablecoin, fiat stable coin. Do you anticipate getting too involved in I take probably not the fiat to fiat world be it different fiat forex currencies but like the fiat to stable coin world is where I think is probably where there's a lot of creative design space we have AMMs right a lot of the AMMs are pretty liquid they can do tokens they can do stable coin to stable coin but fiat to stablecoin is where you need the the the right mix of technology and banking providers and and payment service providers and all these things, right?

Give us a sense of like where the the fiat to stable coin on-ramp off-ramp flows. What what is the stack there? How does how do those flows look?

It's a mess. It's incredibly difficult to wrangle all this stuff. It's all the stuff that typically a cryptonative team a has no interest in doing and b has no ability to do it.

We're a very strange team. We're kind of like uh you know, part eagle and and uh part lion, you know, like we're we're a griffin company. One side of it is like very native, extremely cryptonative, all the native tactics, and the other side is a lot of tradition.

In my view, there's a lot of pessimism right now about like tokens blah blah blah. What is the path forward? The path forward is Griffin companies that really can understand both sides and can apply these interesting playbooks that nobody else can even replicate because they don't just they don't have both sides of the knowledge in their head.

You'll see more and more that that intersection is where all the interesting things will happen. I mean this is this is what we've been calling neo finance and so you know this idea of sort of you know straddling that line in the middle uh these teams there was crypto native infrastructure slop that never found product market fit on one side that's getting forced to you know rethink I think man you had uh you coined the term research fetish which I think right was spoton and we we've been using that thank you and then on the other side you've got this legacy financial you.

This system that's worked for a long time but is is ripe for innovation, ripe for disruption. They're also being forced to innovate. Ultimately it's not just that these two things are innovating in parallel. They're actually innovating to the same place. This is kind of that Griffin convergence area that you mentioned.

This is where, you know, we think that there's a ton of opportunities to explore more sustainable businesses, actual businesses if you're coming from the crypto world. We're we're calling that that neo finance because it started with stable coins. The reality is that there's an entire world built around these stable coins.

There's financial mechanisms, money markets, yield sources, all of these things that are built around stable coins. I think I'd actually love to explore it from both lens. Why don't we start with the crypto side?

What do you think the crypto side of the world gets wrong about like the more traditional payments side of the of of the equation?

I think first of all like traditionally the problem has been like nobody wants to even think about it because there's been such a graveyard of payment crypto payment companies, stretching all the way back to like Satoshi you could say like Satoshi was e- money e- money but then if the denomination moves is a you know $10 asset like that's probably not a very good payment rail.

I think of late it's just a bunch of guys who don't know what they're doing. It's very hard to acquire the expertise. It's very hard to shed old habits. I think many people are thinking of stable coins as like another narrative to shout about, which is very strange to me.

I see some like shifting to AI where like, you know, people want to kind of ride the AI coattails. They want to do like AI to AI economy using stable coins. Like, you know, there's a guy like launching meme coins for, you know, the the COD bots and whatnot. Like, dude, like, why are you riding the coattails off somebody else's product market fit? We have our own now.

You actually don't have to do that anymore, man. Just focus on what's working. Look at the numbers. 200 billion to 300 billion. 100 billion doesn't happen. That's not, you know, somebody's not rigging that, right? That that's real.

If you look at the spread between like, let's say, Salana, Salana this week is down 17%. and stable is up 40%. Stable is another, you know, stable coin chain pure type, right? Why is the spread 60%. Well, because markets are realizing where the real stuff is.

Really guys, there's no need to you don't have to do all dance anymore. It's here. We're good. Let's just do the thing.

I think that's why we're seeing a lot more incoming builders, founders into the stable coin world.

It's pretty obvious. It's like the timeline is reaching this kind of max pessimism phase just at the same time like the product market has never been realer. It depends how much emotional volatility you can handle, I guess.

Crypto's always been if you can't handle the volume, you know, get out. It's always been a roller coaster, man.

I want to get a concrete you know some commentary on a on a concrete example in the crypto world. Take polygon right and there's a number of examples but I think you know that polygon is an example of look they've been in the in the space for a long time. They've built a lot of different stuff from zkms you know all all the way through the docket.

Now it seems as if they've really reentered around this open money stack, right? This, you know, payments broadly, using stable coins and onchain rails, acquiring a couple companies. Is this the right approach? Do you think, you know, they've kind of gone too far and they're losing a little bit of, you know, what, you know, where they came from, a little bit of their roots generally? Just curious how how you're seeing this Polygon open money stack.

I don't know too much about the specifics there. I can comment generally on how these chain deals tend to work. Chain deals typically are like yo guy like use my chain which is the same as every other chain. Where it matters, right? Sure they're like technical differences but like on a product basis it's really very similar. Use my chain and I'll give you some tokens.

I think that just doesn't work anymore. I think what you need to do instead is you need to build differentiation that's real. For instance, if you ask a builder like, you know, would you like to build on a substrate where you have the cheapest possible FX at all times? Of course, that's a very easy sell.

How would you like to build on this 50th deployment of OP stack? I don't know why. Why? Well, we have tokens out on, right? Your tokens are colored green, the guy's tokens are colored yellow, and you know, there's a very thin marking layer around, but it's like, what what the hell are we doing here, guys?

That's when you start seeing the vesting cliff reached meme and the guy jumping off. That's that's what ends up happening there.

That's kind of the how the crypto side is approaching this this convergence. Now, if we look to the other side, you know, I could see how if I'm if I'm strongmanning or trying to strongman here, you know, someone from this side is going to say, "Hey, I I think it sounds great." You've got this on-ramp off-ramp thing. The cheaper, faster, better is a no-brainer.

If you can get to that liquidity point where you're able to offer cheaper and better execution, but you know, you know, Han, like this is a new game for you, right? you guys have been building maybe a couple years like there's forex incumbents that have been building for decades. How do you achieve a liquidity landscape, liquidity milestone that ultimately gets you better execution than some of the incumbents?

Some of the cryptonative tactics we know can be applied here and give us an unfair advantage. Please uh you know more just what are those like be more specific? Unpack that for us.

I think there's a really underexploited opportunity here of you know the right structuring when it comes to NIM shares of like local non-dollar stables sharing NIM as well as an intelligent incentive system that you know isn't just like trying to drive up TVL for no reason or trying to drive some vanity metric but is actually creating this new financial primitive onchain FX and like to pull something like that off requires nativity. That's actual useful nativity.

There are many smart payments people, but this is a total totally different ballgame. This is a very different type of ball game. I think again like there's this type of intersection that I think is really interesting for the right people to explore these type of Griffin companies.

Specifically, we're looking at targeting like some some currencies in developing nations that currently don't have the liquidity topography that a lot of the you know the US dollar to euro like you said you're you're not kind of staying out of that market for now. But you think it it is achievable to become some of the most like one of the most liquid venues for certain currency pairs?

We think so. Well before we are the most liquid I think we can be extremely competitive in cost much cheaper in cost as well. A lot of this is I think price discrimination that's being used against people who don't have power.

One of the great virtues of being a a tech startup at the frontier is that you know I don't wake up every morning and think like how much gross profit can I generate right? I I don't really care right. We need to get a network effects and I want to grow that's what matters.

I think the combination of those forces make it quite likely that for many pairs, many interesting frontier pairs, the onchain FX markets will become the default markets.

If you're looking at onchain FX my understanding is that a lot of the FX volume currently you know it comes from speculation like it's people that are you know taking out some leverage and you know they're they're you know increasing their their notional size by by you know orders of magnitude.

Is that also the case onchain or is it more for payments and you know those sorts of things or is it is it also for currency speculation?

We have considered building products that are like specifically tuned for currency speculation you know that embed more leverage in them. I think what we are seeing the market pull out of us right now is like real business like players right like somebody really wants to do a crossber payment and they need stable coins or you know they're trying to get out of some hyperinflating regime and they prefer to denominate their profits in stable coins that's what we're seeing right now and that's what we're building for.

Aesthetically I kind of like that better than you know helping some dude like go 20x long you know yen USD or that one seems more the one we're doing seems more useful for society.

Walk us through like the user experience, right? But but for a business that is looking to escape a hyperinflationary currency and and utilizing codecs, you know, to get access elsewhere.

There's three ways to interact with us today. You give us a ring or, you know, a telegram. You speak to us directly like that through voice. You can use our UI which is a guey or you can use our APIs.

Depending on the type of business they'll prefer one of these three you know types of modalities and across all these platforms you know our commitment to you as our customer is that we will source you the cheapest possible FX liquidity and okay anything to anything to hammer that one home.

Someone can just give you a call you know if they're if they're trying to do a crossber payment they can give you guys a call you'll do like OTC or block pricing and and deliver the the end currency that the destination currency that they're looking to achieve.

That's right. The denomination you want in the form you want. You want stables, boom, you got stables. You want fiat in this bank account, boom, you got fiat in this bank account. That's what we specialize on.

What would you say is the is the path to scale? You guys are at a billion dollars in volume now. How do we get that to to 10 billion and eventually 100?

I think the onchain component of this is crucial. I think it it will give us this structural cost advantage that I think is very hard to beat and I think you can run this flywheel where you know the cheaper you're able to provide this FX the more customers you have the more liquidity the cheaper the FX and so on and so forth and we have tokens to juice that flywheel.

What we need to distinguish here is like a useless Ponzi token incentive thing where like you're juicing a something but there's nothing there, right? like you're you're trying to beat the horse to death and the horse is dead and there's not no matter how much token incentives you do the horse is still dead versus like you're starting an actually useful thing that is going to be like a key primitive in this new system that is novel as well that nobody has ever pulled off yet.

We obviously saw plenty of like examples of doing it the wrong way right with token emissions pool two. Now, you know, part of this neo finance thesis is that like there's actual businesses underneath the hood. You need real revenue. You can't just exist in cryptonative infrastructure slop land anymore, right? It's a it's a, you know, reality check for for a lot of these businesses.

Last time you were on, we also talked about geographical, like regional stable coins. I'm just curious how you're thinking about this, you know, you know, fast forward a couple months because I if you know, we go to developing countries today, you know, the most popular stable coins are USDT for the most part, right? is the US dollar denominated stable coin and and so it almost seems like actually I I I don't think anyone would debate this that right now US dollar denominated stable coins have more market fit in the developing nations than like even their own currency stable coins right so so h do you expect that to change because it seems like in order for obviously fiat to stable coin even if it is just dollar stable coin that can still be a tremendous business but I'd anticipate that you know in order for um you know the the onchain FX market to really take off, we would need some regional stable coins to to develop more more in growth. Is that how you're thinking about this as well?

We think we have a contrarian view that non-doll stable coins have immediate product market fit and that product market fit will be as a way to do onchain effects. meaning it's its primary use will be so that you can trade in that denomination onchain for that FX not so much that it itself will be the payment instrument it itself could be off-ramp back into the fiat if need be that's kind of our view and if we're correct then uh you know this is about to get pretty exciting.

The way to think about this is more so as like tokeniz like if you look at the US equities market New York stock exchange is talking about getting to, you know, tokenized equities. It doesn't really give the actually it gives the shareholder less rights, right? There's like not bankrup bankruptcy protection. Oftent times they're just buying like an SPV wrapper of the actual share.

The New York Stock Exchange is still getting into tokenization for these reasons because it can kind of proliferate their th those assets further, more people can get access. You're saying that people may not actually need or want the the regional stable coin, you know, specific to your to your, you know, desired and, you know, ideal business case before of, hey, we actually want to help people like we want to deliver these currencies that people actually want, not just a speculative vehicle, right? Are you saying that, you know, regional stable coins are more so a speculative vehicle and those can still provide a lot of value for doing onchain FX? They're just not to the key business proposition of helping people get the the form factor and currency that they are looking for.

I um we're we're getting into pretty like kind of technical territory. Let me think about how best to express this. So the local stable coins themselves are an interesting banking rail. Think of it that way where people who hold that local stable coin can burn it and get back into fiat. That's a very interesting avenue.

What do I think the non-dollar stable coin product market fit will be immediately? It'll be twofold. One, it will be people who may want to end up back in fiat, local fiat, right? And there's a way for them to do that now. So then why would they go through this like uh non-dollar stable coin is because then they they got the cheaper FX. That's why.

You're saying it's cheaper to go from their regional stable coin to their regional fiat than go from USDT to their regional fiat.

That's right. There there other like complicated reasons why why that might be the case. The second interesting use case here is well look if you're sitting in some local fiat. Well, why wouldn't you prefer a version of that that actually yields a ton more and is safe, right? It's just on the other side of this FX trade.

That's what I I see kind of the immediate product market fit being now. Five years from now, who knows, right? But, you know, I need to live in the present and that's why again we're we're so convicted on the direction we're taking.

This is something that like you said I it's a contrarian view. I think others are not seeing regional stable coins. They're going they're you know circle's got their do their euro product. Tether is almost going away from this completely. It seems like they're going more tokenized gold than regional stable coins. They just announced another USAT, right? This US dollar or US Tether like you know partnership with World Liberty Finance guys and and that whole thing.

Any comments there? I just I haven't heard too much about that, but you know, there's other there's other things. It's a good gig for Bo Hines, right? It's great gig. Shout out to Bo. Good seat.

The other thing I wanted to chat with you about here was, you know, the DC rumblings, right? There's plenty of this at Davos as well, like you know, people are worried that paying yield on stable coins is going to end up with capital flight out of US banks and into stable coins. Banks seem afraid.

On the other side of it, you got Tether saying like, look, we don't even we don't even want to pay yield on our stable coins. We've got plenty of market share not paying yield. don't come at our bottom line and and you know make us you know pay yield on the stable coin. I was on on a call the other day and with and it almost seemed like it wasn't just the banks and the crypto players fighting it out anymore. It was like this divergence between the crypto players and now it's a three-headed beast.

Just tell us, you know, where where's your perspective on this?

Incumbents are incumbents no matter whether they're crypto or trad, right? Incumbents will reach for regulatory capture as the tool to keep out outsiders. So if you're hollow today and let's say you know Nick Van comes along with Agora, like what's a great way to kneecap Nick Van? Well, like making it impossible for him to compete with you on margin.

You already have scale, right? Tether doesn't need to pay anybody to use Tether. But if you're if you're if if you're going to try to get people to use um you know um let's say CLA stablecoin you probably are going to have to pay up in some way for that and what better way to kneecap the competition than to say that's illegal. It's not possible.

The depositbased arguments from the traditional banks I think are a little thin. I think the truth is probably the exact opposite actually. Much of credit creation in in the American economy is not actually through the banks these days. It's through you know separate institutions like credit funds and other places and part of the reason that rates are as high as they are is because that the banks are this way and if anything actually the movement of capital into stable coins might actually compress rates and make everything cheaper for everybody.

I think the lobbyists are making a series of very aggressive arguments that probably don't hold up if you look at them.

If you know say tomorrow right you you end up getting this clarity act approved and they can pay yield and we do see a capital flight just you know even that that may be unlikely but if it were to happen even if it's not 9 trillion or whatever you know the estimates are from the banks but you know even even you know a more reasonable number I is that a deflationary pressure would you say that you know because in the in the traditional credit creation world, right? You have money that's rehypothecated a few times. A dollar in deposits is more like $10 circulating.

By transferring that into a stable coin world where everything is one to one fully backed, are we not are we taking, you know, the other $9 out of the supply and kind of squashing everything back to the capital base? Is that is that a tr is that a truth to this argument even if it's not nine trillion at scale?

Let's take any like I think it's like it all sounds very scary in the abstract right but then once you make it concrete I think it will be clear why it's not true let's say you're buying a house you're going to have a mortgage right you know like how are mortgages created now the banks at some point may have originated and packaged them but today sure as hell they're not holding on to the principal risk meaning somebody else is holding on to the other side of that stuff it's not a bank and so this has nothing to do with you buying mortgages you get you and the costliness of being able to purchase a house and so like you know credit creation and all these things the words sound very big and sound very scary but in actual fact