Stable coins or tokenized stocks or dollars on blockchains rivals the size of the Visa network. Trillions of dollars transacted. If you have a dollar of that stable coin, there is a dollar sitting in the bank. And that's why the Clarity Act working its way through the Senate is so important.
One of the biggest opponents to the bill is Senator Elizabeth Warren. And why are we working on this? She says that North Korea and terrorists and ransomware hackers, they're going to run wild if this bill passes.
The national security people I talked to typically don't agree with that because there's a trail.
Another debate that has been opened with respect to the Clarity bill. Developers should be held more liable for the software that they write.
If you saddle people who build products that get used by many people for many reasons, it's a kill shot to the industry, which is clearly the goal.
Volumes are now rivaling the Visa network which is insane. Lots of gigantic financial institutions have rushed in. BlackRock, JP Morgan, Visa itself, Mastercard. What happens if Clarity does not pass?
Welcome to the A16Z Crypto Show. I'm Robert Hackett and I'm here with Marc Andreessen and Chris Dixon who, if you watch the show, need no introduction.
So, today we're talking about regulation. Congress is currently hashing through some legislation, once in a generation market structure legislation that could determine where the future of the financial system and internet get built. It passed in the House last year with bipartisan support and it has been making its way through the Senate ever since. Now, there's been lots of fights and obstacles over it which we'll get into. But before we do, I want to zoom out and go big picture and talk about why regulatory clarity matters, what the status quo costs us and what's at stake for the country and for anybody who may end up using this technology. So, Marc, I'd like to start with you. Back in January 2014, you wrote an op-ed for the New York Times called Why Bitcoin Matters. Things were a little bit different then. This was a pretty contrarian position to stake out. The crypto industry, which if you could even call it that back then, looked very, very different. How have things changed from then to now?
Yeah, sure. So 2014 was so long ago that the New York Times actually ran a positive piece on crypto with my name on it. And so yes, this was in the distant past. This is for the kids watching this. This is when dinosaurs roamed the earth, 13 years ago. Might as well have been in the 1500s. But yeah, I'm actually really proud of that piece. So if you read that piece today, I think it holds up really well. I think it holds up in a few respects. So, one is, and I should say this, like it's actually fairly amazing. The Bitcoin white paper, this piece is even five years into the macro trend. And it was still the kind of thing where it was still big news to even believe that this technology mattered at all. So I think I was predicting not that Bitcoin was going to matter, but I think I was predicting and kind of forecasting that we were still in the beginning of the adoption curve. Like there were still a lot of people that were going to have to learn about this, want to learn about this, and be part of it. And so I think that holds up. I spent a lot of time in the piece and around that time trying to really educate people on the nature of this technology, with Bitcoin, with the blockchain, because that was new. And for people who don't have computer science degrees or math degrees, it's kind of a weird idea. So for people who don't have computer science degrees, it's a genuinely new idea. And I think the importance of that has held up really well. I think the thing that in retrospect needs to be changed about the piece is every time I said Bitcoin, you just swap in crypto, right? Which is like at that time Bitcoin was crypto, like it was essentially the only game in town. Chris, you can correct me on the timing if you want, but I believe at that point there was the proposal for what were called colored coins.
Around then. So people don't remember, there was a proposal for this thing called colored coins, which by the way is the single worst branded proposal of all time. Much, much, much worse than New Coke. But the concept of it was actually bitcoins that were going to be tagged basically with properties that would let them represent other things. And so that sort of idea was that Bitcoin would be extended to basically enable both tokenization of real-world assets and also virtual assets like NFTs. Of course, what happened was that didn't happen, and what happened instead was the creation of new blockchains and the creation of new crypto platforms, and then ultimately Ethereum and then everything else that followed. And so what started as a technology became an industry. And so I think if you read that piece, you'll see that I projected many of the use cases and the future development of the technology, but it took a different path. Now, Bitcoin obviously has been very successful since then, but what we've really seen since then is this explosion of innovation that has both happened and that wants to happen around all the other use cases that we talked about in the piece.
Yeah, it's actually remarkable how well that piece holds up. But there is one forecast in there that I want to cite in particular that stands out, which is, and I quote, you say, 'The coming years will be a period of great drama and excitement revolving around this new technology.' I think you were spot on there. Chris, you've been there since the start as well. You were an early advocate and acolyte of crypto. How have things changed from the early days to now?
Well, as Mark was saying at the time, way back sort of 2014 in the early days, it was mostly kind of hobbyists and super enthusiasts and kind of a subculture cultish thing. The technology was, Bitcoin was sophisticated but a lot of the things Mark alluded to, like the newer blockchains, were early, had performance issues, scaling issues, other kinds of things. Fast forward today, every day you'll see a new announcement from a major bank or fintech company announcing a platform involving stable coins or tokenized stocks or other kinds of digital assets. The stable coin volume, so stable coins for those who don't know are basically what Mark described with Bitcoin except they're dollars on blockchains. That now rivals the size of the Visa network. Trillions of dollars transacted. You can go into WhatsApp and send money anywhere in the world for almost free in the same way you'd send a text message using stable coins. It's really the way money should work. I think Mark could speak to this as one of the pioneers of the internet, but I think it was one of the ideas that early internet pioneers expected to happen honestly much sooner and for a variety of reasons took a lot longer. But we're now finally seeing that dream come alive with money moving as easily as bits. So now it's a very mature industry. The underlying infrastructure has gotten much, much more sophisticated. Even three years ago what I just described might cost a couple of dollars if not tens of dollars to do that transaction. Now on most of the popular blockchains, Solana, Ethereum and so forth, it's sub-one second to close to settle the transaction, sub-one penny to send something. And that's due to kind of the equivalent of Moore's law on blockchains, which is you've gotten more and more performant chains. You read about hacks and things in the newspaper about crypto. The reality is Bitcoin has never been hacked. Ethereum has never been hacked. Organizations that use these things have had lack security and have been hacked, but the chains themselves, highly secure, highly performant now. And you have big institutions and trillions of dollars moving around on these things, which of course brings us to our topic, which is when you have that going on, you need regulatory clarity. You need a framework around that.
Let's talk about that. Because you cited that stable coin volumes are now rivaling the Visa network, which is insane. This is trillions of dollars per quarter turning through this system. Lots of gigantic financial institutions have rushed in. BlackRock, JP Morgan, Visa itself, Fidelity, Mastercard. I mean you could rattle off just any number of names and they're all building on this technology right now. But we've gotten this far without rules. So there's been very little in the way of regulatory clarity or guidance. Why do we need rules now?
Well, so yeah, good question. For a variety of reasons, for political and policy reasons, the regulation around crypto was broken into two components: stable coins and the rest of the market. So stable coins are roughly 15%, let's call it, of the market. 85% is the rest. There was a bill...
And that's by market cap.
That's by market cap. Last year a bill passed Congress, was signed by the president, called the Genius Act, which provides a comprehensive regulatory framework for stable coins. And it's not a coincidence that stable coins are also the area that's taken off the most in the last year because once you have regulatory clarity, that means builders have certainty. Consumers can know if you're an American consumer and you use USDC or another Genius-compliant stable coin, you know that if you have a dollar of that stable coin, there is a dollar sitting in the bank because that's the Genius regulation. That bank is audited and that's sitting in short-term treasuries, which is basically the safest thing the financial system can offer. And so you know that dollar, you can be assured that dollar is there. It's not an FTX, it's not a Luna Terra situation where it will disappear tomorrow. That gives you as a consumer confidence and protection. If you're an institution, if you're a bank, if you're Stripe, if you're PayPal, and you want to enter this market, you want to know there are predictable rules, that there's a framework around it. There's not going to be an FTX, that what you build will be compliant, not just the next year, but the next 10 years, right? And then if you're an entrepreneur, of course, it's similar kind of logic. You want to know there's certainty. You want to know there are rules. Our entrepreneurs are happy to hire lawyers and pay a lot of money to be compliant. They just need to know what they're aiming for. And so as a result of that bill, we've seen a takeoff particularly around stable coins. And then kind of the close cousin of stable coins is once you put a dollar on a blockchain, you can put a stock, you can put a treasury bill. And so that's also seen a lot of adoption with people relying on agency guidance and other non-legislative regulatory levers to give them guidance on how to do that. But the big hanging problem right now is that you've got this other section of the market, including blockchains themselves which stable coins are built on, which don't have a comprehensive federal regulatory framework. And that's why the Clarity Act, which is working its way through the Senate, is so important, because that provides sort of the other 85% of the market. So you can kind of imagine it's like as if we had a regulatory framework for cell phones but not for cell towers. Half the technology is regulated. The other half has this sort of uncertainty around it. People are still building there. People are trying to do their best to understand what the rules are there. There's this other lever of policymaking which is the agencies such as the SEC and CFTC. They've provided some guidance and things, but ultimately what industries are built on, as you alluded to in the beginning with the internet, is they're built on legislation. Legislation is solid ground to build on. It's immutable. It has the stamp of approval of the US Congress. Importantly, legislation is the result of a lot of smart people getting together, people from different political parties compromising, finding the right balance between industry and consumer protection and so forth. And so we think ultimately that's what is required and why the Clarity Act is so important.
So, as you mentioned, we do have some rules. It's for stable coins, that covers a sliver of the market, but there's this gigantic swath of the market that remains largely unregulated. Marc, why do we need rules for all of this and why do we need them now?
Yeah. So we've been in this just kind of bizarre twilight state for the last several years where crypto was developing largely without rules for better or for worse in kind of what I would describe as experimental ways between inception through 2020. And then between 2020 and 2024 we had an administration in the White House that absolutely decided to just kill the industry. Flat out declared war, specifically, declined to regulate, refused to regulate, and instead decided to prosecute. And this kind of really remarkable thing happened, which the industry didn't die through that process. Crypto is still standing. And the most bizarre aspect of that for me is I've had these conversations with some lawmakers in DC where they say, 'Well, I'm going to support crypto now because if it didn't die during this whole period when we tried to kill it, then it must be good. We should probably support it.' Which is sort of the most reverse logic way I can think of to end up positive on something, but I guess I'll take it. And so that also led to this kind of bizarre situation where people said, 'Well, crypto hasn't materialized in the way that you guys all said. You don't have all these use cases. Where are all the use cases? Why isn't everybody using crypto?' And it's like, well, because there was a five-year regulatory prosecutorial assault that tried to kill it. And in most areas of tech, industry never goes through that. Occasionally you get one that does, and when they do, they live a very different life under very different kinds of pressures. And then along the way, when that sort of assault was happening in America against American companies primarily, the overseas companies by and large ran in whatever way their local jurisdiction allowed. And that culminated in the catastrophe of FTX, outright stealing customer funds. And then that led to a catastrophic blowoff. And then people look at that and they're like, 'Well, see, you can't trust crypto.' And of course the real answer is you can't trust fully unregulated crypto. You actually have to have a framework and you have to have risk controls of these companies and you have to have compliance and you have to have auditing and you have to have all the things that a grown-up financial services business has.
And so anyway, long-winded way of getting to the point, which is we need a stable, permanent regulatory structure for crypto in the US the same way we have for stocks and bonds and everything else. And we need it both because we need this industry to succeed, which we think is extremely important, and then we also need it so that it doesn't lead to catastrophe. We need it so that it doesn't result in where FTX is. And we need it so that people's money doesn't get stolen. And we need it so that the winners of the market aren't fly-by-night operations operating on yachts off some coast somewhere. And so in a lot of ways, it's like the most obvious thing in the world. The US financial system has been through this many times before. The most famous case is the securities acts that created the SEC, regulated the stock market, after which the US capital markets in the next 90 years became the envy of the world. We're not looking for a free lunch. We're not looking for subsidies. We're not looking for protectionism. We're not looking for support in that way. We're just looking for a permanent framework that lets people do business in a responsible way. And I think it's in a lot of ways the most obvious thing in the world.
So you mentioned something in there which is FTX. I think everybody might remember that exchange and its big implosion and collapse and all the fallout from it. What is inside of the Clarity bill that would prevent something like that from happening again?
Yeah. So right now there is no federal regulator for crypto exchanges as an example. The New York Stock Exchange, NASDAQ, they have federal regulators. Right now there is no, the Coinbases, Krakens, FTX, for every good company like Coinbase there are many offshore ones that are not good. There is simply no regulator. This is one of the very important things. It's a big chunk of the Clarity Act is to provide that. So that the SEC and the CFTC have oversight. They put in disclosure regimes, anti-fraud regimes, insider trading rules, all the things that we are used to, as Marc was saying, with other financial markets. It's just the same kinds of rules with the same agencies overseeing them. So for example, FTX wasn't audited properly. Very simple. This is what ultimately happened, right? They were apparently moving money between different entities. They didn't have all the money there. If you're a federally registered crypto exchange, at an absolute minimum you're being audited, you have all sorts of controls, they have surveillance regimes, there's a whole suite of things that are in the act that would empower federal regulators to do their job. And if you're not compliant with these things, you couldn't operate in the US, is how it works. So it would have prevented other big catastrophes. Terra Luna was a big one. It was a stable coin that wasn't stable. It didn't have dollars or any other kind of stable currency behind it. It was essentially this self-referential thing where the token is valued by the token and would never have been presented as a stable coin and would be illegal. It is illegal under the Genius framework.
Works well when things are going up.
A lot of things work well when things are going up and then don't work otherwise. So, yeah, look, the details are hard, which is why it's been seven years or so that some of us have been working on the Clarity Act. And it's now been a year, I think over a year since the House passed its version of it, and the Senate's been working on it. There's a lot of hard details. It takes a lot of working across the aisles. This has been a very bipartisan effort. So I'm not going to say the details, but this has been done before, right? Financial industries have been regulated and the principles that are used in other industries are applied here and it's very robust. What's in the Clarity Act now, the text that was released, it's frustrating to read some of the news coverage which apparently they don't read the bill as far as I can tell because they say things like there aren't safeguards, for example, AML and sanctions regimes and all this. It's simply not true. It has strict definitions of who is subject to these requirements. It applies all the same kind of money laundering and treasury rules to crypto intermediaries that are applied in other markets. The Fraternal Order of Police just came out with their endorsement of the Clarity Act, the largest law enforcement organization in the country. So opponents are saying it doesn't have proper law enforcement clauses and rules, but this is simply not true.
Yeah, let's talk about that. Let's go over the fights that are going on with this bill. By the way, it's like 600-something pages, I think, at this point. But so let's go over each of these fights, each of these debates that's going on. You talked about illicit finance. That's one of the big ones. And in fact, one of the biggest opponents to the bill is Senator Elizabeth Warren. Her and her camp, she's called it a ticket to sanctions evasion. That's a quote from her. If you hear her describe it, she says that North Korea and terrorists and ransomware hackers, they're going to run wild if this bill passes. What do you say to that?
I mean, right now it's extremely unclear which entities are subject to what rules. And so what you have is essentially a dynamic, what I've learned is when you have gray areas in regulation, you have essentially a race to the bottom, right? Because you'll have, look, I was on the board of Coinbase for a long time. Marc's on the board. Coinbase is a US-based company. They take regulation and compliance extremely seriously. But for every Coinbase, it costs a lot of money and it slows down your product development. And so every year a new offshore competitor will pop up that doesn't do those things and becomes popular because they can offer lower fees or iterate their product faster because they're not doing all the compliant things. And so over and over again we've had this phenomenon where there's the good actor, and this is one of the things that frustrated us frankly, is that we try to bet on the good actor, the compliant actor, and then for every one there's kind of this evil twin, the doppelganger offshore that copies all the features but doesn't do the compliance and gains popularity. And so what you end up having is the ambiguity ends up favoring the bad actors, right? And so the important thing to do with good regulation, I think the Clarity Act does this, is you very clearly define the regulatory perimeter, like who's subject to this and who isn't. And if you're not subject to it, you can't do business in the US. So if you're in the US and doing business, you have to be subject to it. You give clear definitions and then you have clear rules. And so as an example in the Clarity Act, if you're a financial intermediary, if you're somebody like a Coinbase or a company that's holding customer funds, you're subject to all of the same regulatory rules that a fintech, a company like Stripe or PayPal or anyone else, and it's black and white in the bill. So I don't know how to argue with people that just simply are saying things that are factually untrue. And as I mentioned, the endorsement of the various law enforcement agencies, there's a lot of Republican senators who are very strong on national security, sanctions, North Korea, who support the bill, including a number of Democrats who we think will end up supporting it who similarly are. So I don't think it's true, nor is it shown by the range of support for the bill.
Marc, what do you think about this criticism that the bill enables sanctions evasion?
Yeah, so it's really, you know, spent quite a lot of time in the national security world, and I would say the national security people I talked to typically don't agree with that. And in fact, they typically say something quite different, which is ironically they're hoping that more criminals and terrorists use crypto and use blockchains because there's a trail, there's a blockchain and there's a trail. And that is contrasted specifically with how a lot of terror financing happens today. And so I'll just give you an example of this. There's a thing in the Middle Eastern terror worlds, these terror organizations, there is an existing legacy payment system that by the way is not the banks, it's not any piece of technology. It's a system called the Hawala system. And it's an ancient, centuries-old system. It's basically informal peer-to-peer payments. And it operates fluidly across borders. And the way that it works is you'll have like two cousins, one in one country and one in the other country. And you go give money to the cousin in one country and then that cousin tells the other cousin that the family now has that amount of money. And then as a result, the money effectively becomes unlocked in the other location. And so you literally have peer-to-peer payments happening around the world with actually no actual transfer of physical cash. So you can't catch it at the border. No digital trail whatsoever because nothing has happened digitally. No paper trail. No nothing. And I think that's actually how a lot of terror plots are financed. And so there was actually a term a while ago that national security people were kicking around. They called crypto prosecution futures, which is if we could just get the bad guys to use crypto instead of using the other methods, we would actually be able to then mine the blockchain to be able to prosecute down the road. And so this is one where it's just the whole thing has just been incredibly confusing the whole time because it's kind of this upside-down backwards kind of thing. And quite frankly, not talking about anybody in office, but there have been even people in industry who have said things like, 'Well, crypto is inherently anonymous and you can't trace anything,' which is just upside-down bizarre world claims, which I think frankly just stands for people not understanding the technology. And so I think just the actual reality of it is if more bad guys were running more money through crypto, I think more bad guys would get caught, not fewer.
Right on. And there's this thing that happens on TV shows. I'm sure you watch them. Crime procedurals, cop procedurals where they're like, 'I'm the criminal, wire me the money in Bitcoin. Nobody's going to know about it.' Is that totally crazy?
Yeah. So there's a couple things. One, the traditional thing that they do in TV shows is they say, 'Well, you need to put a gun to somebody's head. They say do a wire transfer, like wire transfer the money.' And then they'll literally show a digital display and it'll literally have one of these things where it's like zero to 100% as the money moves and the whole thing happens within like two minutes. And then in the real world, it's like, okay, try to move money through the banking system across borders. Good luck. Days and days and days because the systems are shut down and they don't work on weekends and the paperwork and this and that. It's just completely flat out wrong. So you're exactly right. What's happened is they've extrapolated that straight to crypto. And yeah, it's like any of these things which is like, yes, it works straight on TV. Television is not actually real life. And yes, it very much does not work that way. The existing payment system does not work that way in real life and crypto does not work that way in real life.
It's actually a non-trivial kind of research problem that's going on today. Research and product development to build blockchains that do have privacy because they are so public. And in fact one of the funny things that happened was we think that's important just not for nefarious reasons because if you want to pay for some service, maybe it's a medical thing or a financial thing, you don't want everyone to know about it, just like we do in the regular financial system. You'd want to have some privacy when you send someone a digital dollar. You want some privacy, right? It seems like a natural thing. It's funny because for a long time everyone said, 'Well, why would you want to build privacy? It's only for criminals.' Since Genius has passed and now dollar-denominated stable coins have gotten more popular, we've actually heard in DC now people are saying, 'Well, what about privacy? You need to have privacy.' I'm like, 'Yes, we agree. We agree.' It actually is very reminiscent of the early internet. Mark, when you guys added, wasn't Netscape, you guys invented SSL, right?
And so yeah, for the kids who don't know this, that HTTPS, that was Netscape. That was an invention. And at the time it was like, well, who would need that? Why would you need to send secret stuff? And at the time probably some bad guys did use it maybe. But of course over time we all realized that was important and 99.9% of it is good behavior, right? It's just people interacting with their bank or something, right?
