80% of crypto trading has actually moved offshore because the US is a bit late on this. If the US doesn't kind of get clear rules out soon, the future of financial services goes outside the United States. It's essentially a loss of American soft power.
Brian Armstrong is the CEO and co-founder of Coinbase, the largest crypto exchange in the US and the first crypto company to crack the S&P 500. He joins Money Rehab on the day the Clarity Act is being voted on. That's a bill he's invested millions of millions of dollars in to see pass. It's disappointing that the Senate didn't vote for it after so much bipartisan work went into it. The reality is that regulatory clarity is coming for crypto. Either way, why he thinks Bitcoin could reach $400,000.
If you look at the history of Bitcoin, it tends to go through these four-year cycles if it follows a similar pattern. Again, I could see a path for us to 3x its prior all-time high by 2030.
Whether or not you can use your Bitcoin to buy a house, Bitcoin was the best performing asset class of the last decade. I don't want to sell my Bitcoin. I'm bullish on it long term. I want to use it as collateral to see if I can get a better rate on a mortgage.
What kind of regulation crypto will be getting in the future and why we should care.
If you want me to go out on limb and make a wild prediction, if the US doesn't get these clear rules soon enough, this industry will move offshore.
I'm Nicole Lapen, the only financial expert you don't need a dictionary to understand. It's time for some money rehab.
Brian Armstrong, welcome to Money Rehab.
Thanks for having me. Appreciate it.
Well, you're here on a really, really big day. This is a day that we just got word like 5 seconds ago that Congress failed to move forward with the Clarity Act, which has been your baby for years and has massive, massive implications on how crypto is classified. How are you feeling?
Well, obviously, it's disappointing that the Senate didn't vote for it after so much bipartisan work went into it, but the reality is that regulatory clarity is coming for crypto either way. I mean, the Senate, by the way, they might revisit it here in a week or two. There's still some negotiation happening. There could be another vote, but even if the Senate doesn't decide to act, the regulators have made clear that they're willing to move forward under their existing authority to publish clear rules for crypto. So the SEC and the CFTC in this case are both very much wanting to see clear rules for crypto in America. And that's something we've wanted for a long time too. So we're going to get it either way. It's important because we want to have consumer protection. We want to make sure that bad actors can't use crypto for something. We want crypto to benefit everyone around the world and to update the financial system which 80% of Americans say is outdated. It doesn't work for them. It's too slow. It's too expensive. And so we've got to get this right here in America.
Why should a person, why should a newbie investor with like 500 bucks in their Bitcoin care about any of this?
Everybody's just thinking about how do I create financial freedom? How do I build wealth over time to benefit my family and myself and my future generations? And so, you know, there's lots of historical advice that people can go to on this with financial advisers and they can try to build the classic portfolio of 60% stocks and 40% bonds or something like that. And what we've realized over time is that, you know, people need to diversify a little bit more than that. Bitcoin was the best performing asset class of the last decade, even with the volatility and I'd say most financial advisers at this point, they say that anywhere from, you know, 1 to 10% of people's portfolio should probably be in Bitcoin as an example. So, it's just that's step one. It's part of every diversified portfolio out there to help people build wealth over the long run.
The second thing is that crypto is not just about Bitcoin anymore. It's also helping people update all aspects of the financial system including payments. So we mentioned stable coins before. We now have a clear regulatory framework and law in the United States to have these digital dollars and they're backed one to one by dollars sitting in a bank account or in short-term treasury bills. So they're very safe and what they allow people to do is make fast cheap payments anywhere in the world. You know, why doesn't money move at the speed of information, right? We're all used to using text messaging or WhatsApp and you can send a message anywhere in the world. It arrives within 1 second. It's basically free. Why doesn't money move like that? You know, banks are closed over the weekend and on holidays, right? When you have actual time to go in there and talk to them. Every time you swipe your credit card at a merchant, you may not see it directly, but they're paying 2 to 3% in fees for that and that fee gets passed on to you as the consumer. So, it matters to you as well. There's lots of people who are trying to send money home to their family overseas and they're paying 5 to 10% in remittance fees. So, payments should flow at the speed of information and stable coins now allow that. So you can actually send for instance USDcoin or USDC is the largest regulated stable coin and you can send it anywhere in the world for less than one second and less than 1 cent. So it's starting to move money at the speed of information which is great.
And then you know we can talk about all the other areas that crypto's updating whether that's borrowing and lending making that getting an instant answer on a loan or a better rate. It's working on things like prediction markets. It's making things like tokenized equities to help the four billion people in the world who don't have access to any kind of brokerage account. How do we make sure that they can get access to high quality investments build their portfolios and for people here in the US too be able to trade 24/7 or easily send a share of stock to your friends and family. So these are all examples of how crypto is updating the financial system and that's why it's important that we get this built here in America.
Yeah. And I want to definitely dig into all of that, but let's double click on your first point for a second. What percentage of someone's portfolio do you think should be in crypto?
I'd say as part of a diversified portfolio, like a lot of wealth managers, and I would agree with this, are now saying anywhere from like 1 to 10% should be in Bitcoin. I think it's anti-correlated with other things you might have in your portfolio. Like if let's say that there's high inflation, people are worried about that or government spending, people tend to rally to Bitcoin in times of uncertainty like that. So it's an important part of any diversified portfolio at this point I'd say.
I'd say maybe 1%. It's been pretty correlated lately.
Well, it's been correlated to stocks recently. You know, it goes through different periods, but and sometimes it's correlated with stocks, sometimes it's not. You know, if generally if interest rates go up, Bitcoin price will go down and the opposite. But all around the world, we're seeing democracies kind of struggle with deficit spending and printing too much money. And when that happens, we see Bitcoin go up.
So, maybe more on the 1%, maybe you're at closer to the 10%. It sounds like start with 1% and see how you feel about it.
Fair. And yeah, learn more. I'd say that's a good place to start.
Let's double click on the second part because I want to break it down very simply even though it sounds cuckoo wonky with all of the Clarity Act stuff. There are different watchdog agencies. All right. Looking over different kinds of investments that people make. So right now major coins, Bitcoin, you mentioned Ethereum are classified as commodities. Commodities have the CFTC over them. That's the less stringent agency compared to stocks that have like the big bad SEC watching over them. But there's now some confusion, right, over other coins. So, right now, Brian, if I buy crypto, who is actually protecting me?
So, you're right. The CFTC regulates commodities like gold and oil and now Bitcoin and Ethereum. The SEC regulates what are called securities, which are basically stocks. And there's been a lot of debate about which one crypto assets fall into. And the reality is you can do both. So, Bitcoin, Ethereum are they're decentralized, kind of like gold. There's no one country or company that controls it and so they are really commodities. I think in the future we'd like to see a clear framework and this is what the regulators are now I think going to publish rules on about how companies could raise money with crypto assets and that those would be securities under the SEC. So there's a role for both agencies. And the way you characterized it was the CFTC is lighter touch, the SEC is big and bad. I think if you ask the CFTC, they would say we are a very serious and rigorous regulator and I would agree with that. So, I think they're both very important and serious and have an important role to play.
Honestly, even at the state level in the US, there's a money transmission license. You know, we can go down the alphabet soup if you want. Even just under like unfair deceptive practices act and there's lots of rules in the US that if you issue or create a product that harms people, you're liable for it. And so the US has very strong protections against this already. Where people have gotten into trouble in the past is where US people have kind of used these offshore unregulated platforms. You probably have heard of some of them, you know, FTX and things like that that blew up and did cause consumer harm. And that's why I think it's important to have these companies be built in the US under US regulatory perimeter and US law.
Yeah, for sure. I think everybody can 100% get on board with that. And I think the question is like crypto obviously $2 trillion. This SEC has $2 billion budget. The CFTC has like 500 people down 21% from last year. $365 million budget. So I'm just saying it's much smaller. And so what people who were criticizing this bill were saying was that they needed to be with the bigger dog, not the smaller dog.
Yeah, that's fair. The CFTC does have a smaller budget. They have a narrower scope. I think they're just as serious on the scope that they do regulate. But it's important to note that in the Clarity Act there was a very clear role for both the SEC and the CFTC. So I would disagree with the characterization that it was trying to give more of the responsibility to the CFTC. I actually think it was very balanced on that.
If a regular person though, if we bring it back to earth, gets scammed under this bill or what the actual regulations look like without the bill, do they have less protection than that if they get ripped off by a stock? I mean, you mentioned FTX, for example. That's what people are really nervous about.
So, I think it's important to distinguish. There's no investment return without risk. So, it's not that these regulators, in my understanding, are trying to get rid of all risk. That wouldn't make sense because then there would be no real returns or upside. But what they do want to get rid of is fraud and people misrepresenting something or failing to make adequate disclosures. So investors should have all the information in front of them that's true to make a good investment decision and then it's up to them to decide how much risk they want to take and I think that's an appropriate balance and distinction to make.
You know, certainty is definitely needed here and it keeps crypto in the United States instead of pushing it overseas. That's I think where everybody hands down agrees. And that's hard to do. So, do you worry that the US will lose dominance here?
Am I worried about it for the US? I mean, yes. I think that again we have two pathways to get there. So, the Senate can either pass legislation or the regulators can publish clear rules and I think both are viable paths. So now it just means we have to focus on the second path and there is a real risk though I think that if we don't get clear rules via one of those two paths in the US that America will fall behind.
I mean one of the greatest strengths of America from creating jobs and tax revenue and economic growth is that we are a financial hub. We are the largest financial markets in the world exist in the United States classically out of New York, right? We have the deepest liquidity for people to raise money and our stock markets are kind of the envy of the world. And it's this great, you know, fuel for capitalism to help people start the next business which hopefully grows the economy and tax revenue and pays for all the services that we need in our society. So without economic growth, you know, a lot of things start to look worse off. Education, health care, deterring, you know, conflict with other countries, like all kinds of things, right? So, I do think it's really critical that America stays as a financial leader and a technology leader. And crypto is really at the intersection of both of those. I would argue it's probably the most important technology updating the financial system at large today. And so, yeah, the clear rules will ensure that these companies get built onshore under American regulatory purview so that folks don't get harmed.
Like if someone wants to build a company offshore and attract customers from the US or anywhere else and they do something bad, the US government really has no authority to go after them in most cases, right? Whether you love crypto or hate crypto or whatever, it's like we got to have clear rules so that people don't get harmed and it's better to have it under US law than offshore in a way that we can't control such as being built out of China or something like that.
Is there an actual cost that we can quantify around the lack of clarity I suppose pun intended without clarity? Can we quantify that in dollars or even delayed innovation?
For sure. I mean just one stat is that something like 80% of crypto trading has actually moved offshore already because the US is a bit late on this. A lot of the biggest companies they famously FTX was founded out of Bahamas. You know, some of the other big ones are out of the UAE. In some ways, this lack of clear rules has done wonders for the economic development of foreign countries. You know, if you're one of the leaders of those foreign countries, you probably should be thrilled about this delay that the US has encountered. But, you know, ultimately, the US is the largest economy in the world and they're going to be a major player in this. And I think with the regulators that we have now, they'll force some clear rules out that'll hopefully allow a lot of this to be these funds to be repatriated.
I mean, just imagine for a moment like when the internet came out. What if the largest internet companies had been built overseas, right? I mean, I know sometimes people in the US we have our gripes or quibbles with Google or Meta or you know the major internet companies, the Netflixes of the world that you know they all could be doing something a little bit better. But I can tell you that when I go meet with governments overseas, we have different offices all over the world. We serve customers in 100 countries. They would kill to have these trillion dollar companies like they drive so much economic growth, jobs, tax revenue, soft power in the world. They would kill to have these companies based out of their country. They're all running these innovation programs to try to think about how they can grow more startups and how can they get the next generation of companies. And the US has this incredible gift that we have these things built here. Even if they're not perfect, we can always, you know, the benefits far outweigh the drawbacks.
So, the biggest concern here with crypto is if the US doesn't get these clear rules soon enough, this industry will move offshore. Just like most of the chips are created in Taiwan. The US invented a lot of that technology, but chip fabs are now mostly happening out of Taiwan. We're trying to repatriate it now. There's a massive effort underway to bring that manufacturing capability back on shore. Or the same thing happened with 5G if you remember that. A lot of that technology China got really good at it and then it created all these kind of national security issues and we had to make a huge effort to bring it back on shore. So if the US doesn't kind of get clear rules out soon, which I think they will, that's the risk is that the future of financial services goes outside the United States. We don't have the ability to police bad actors and it's essentially a loss of American soft power in the world. You could think of it that way.
But I think a lot of people are also confused and there were some new updates to the bill as well around the president's involvement in crypto. Do you think the president's family should be in the crypto business while he's signing law about it?
I know that there was an ethics provision that was included in this bill and that was something that was very important in the Senate. A lot of people on both sides of the aisle were actually debating that it's a little above my pay grade. You know, I was focused more on the rules that would affect our customers. I don't feel like it's my place really to comment on what the Senate should or should not do there. But, you know, I was pleased to see that a really strong ethics provision did make it into the bill that the White House signed off on. It sounds like there was willingness to put that in the bill on all sides. And so, I didn't see that as a major blocker.
Yeah, I think Republicans toughened it, right? But it covered their spouses like officials and then their spouses but not their kids. So the question was are his sons gonna run the company? And so if the president steps back and his sons keep running it, does anything actually change?
These are all big open questions that people have to figure out because on the one hand I can see why someone could be influenced by what their children would do, but it's also like if you have adult children, they're their own person. You know some people are not even in touch with their children, right? So they may go generally in America like if one adult does something that you know untoward it doesn't come back and affect the parent or something. So in some ways how would you even force your adult children to do something different right you don't really control them at that point but these are complicated legal questions and even constitutional questions I would say about the checks and balances of power in the United States between the administration and congress and the judicial branch as well.
Okay. So definitely not something above your pay grade here. Let's dig into the big banks. You alluded to stable coins and the beef there with the banks. Some big banks, not all of them, are upset because they're worried that giving interest on stable coins is going to pull deposits out of the banking system. The banks wanted to ban people paying on stable coins. And then you tweeted Mark it up back in May. So what changed here? And what would you want to say to the banks today after the news?
You're right that earlier this year there was a draft of the Clarity Act that had a number of challenges in it that one of them was rewards, but there was several others around tokenized equities and DeFi, etc. that I thought were non-starters. And so, you know, our overall goal is to try to stand up for our customers rights and make crypto trusted and safe and easy to use in the United States so we can just improve financial services even if people don't know that they're using crypto they can benefit from it and so I felt that the first draft of that Clarity Act missed the mark. I did say that publicly. I'm proud that we stood up for our customers in that moment. They subsequently iterated on it and the latest draft actually fixed all of the things that I mentioned in that post including the stable coin rewards but also the DeFi, the tokenized equities and I believe the last one was around spot market authority for the CFTC. So, you know, it was definitely the bill was in a much much better place.
Now, just I guess to answer your question about stable coin rewards. Just zooming out for the average person here. I mean, our goal is that Americans should be able to earn more money on their money. Pretty simple. And that if you want to hold a stable coin you could actually earn rewards which is basically if the underlying dollars are stored in short-term US treasuries which today pay three to like 4% or so why shouldn't consumers be able to benefit from that? Seems like a pretty logical thing. Some of the bank lobbying groups came out against this early on and I think mainly the reason is competition they just didn't want to have to compete with stable coins that were paying these higher rates but they sort of ginned up a lot of fear out there about this somehow creating deposit flight from community banks. Not that it was really the big banks who were pushing this behind the scenes, but of course, you know, people don't have as much sympathy for the big banks as they're making record profits, etc. And so they sort of pinned it, you know, they said, 'Ah, it's really for the community banks.'
So, we did a bunch of research on this to try to see is there any shred of truth to this or evidence? You know, my skepticism radar was up. But we actually commissioned some studies on this which found as stable coins have grown, consumer bank deposits have also grown. There doesn't seem to be any correlation. The White House Council of Economic Advisors published their own report which indicated that there was no correlation between these two things and in fact it would be a net harm to society to prevent rewards on stable coins. It kind of defies the just like simple logic. If you think about it like there's already things like money market funds which people can put their money into and earn these rates on short-term treasuries. So and money market funds are now like $7 trillion yet plenty of people store their money in banks as well. And so it sort of defied credulity and I think it was essentially misinformation published by the bank lobby to try to prevent their competition in the market. So in my view that was an unethical thing and most of the Senate got wise to this very quickly and realized what was happening.
The last thing I'll just say there was a couple things that came out at the last minute which I think was the final nail in the coffin or you know on this argument which is number one we actually came out and said we're going to provide technology to community banks to integrate stable coins despite some of the negative reaction from a couple of the big banks. Many of the banks BNY Mellon and Goldman Sachs and you know I think Citi and organizations like Fidelity and like some of the biggest financial institutions in the world came out in support of the Clarity Act including the stable coin rewards and we actually came out and said well we're going to provide this technology to community banks if they want to integrate stable coins because I want community banks to win. I want the big banks to win. Even the ones who fought against it or lobbied against it I want them to win too. You know, Coinbase is actually powering stable coin integrations for many of the largest banks as well.
Help me understand though, when I hold USDC on Coinbase, you pay me a reward. So, is a reward the same as yield or interest? Is this a tomato tomato situation?
So, this gets into lots of legal questions. But for the average person, you know, what it means is that if you're storing a balance on Coinbase, and underneath that the dollars are being put into short-term treasuries that are earning three and a half or 4%. Some of that can be passed back to you. You know, we call it a reward in the sense that it's like a loyalty program. You know, there's been various debates about the nuances between yield and interest and rewards. You know, interest is something that people typically think of more in a bank account where the banks are doing something called fractional reserve. They're actually lending out your money underneath even whether you know it or not and they don't actually have all of your money there. And so they might pay you interest. So there's different legal definitions of these things. Just to make it super clear that it was not interest deposits, we call it rewards and it's just passing along some of the economic upside of where your dollars are being stored underneath.
Some of the banks that you mentioned like Goldman, you did not mention JP Morgan. You've had some kerfuffles with our friend Jamie Dimon in particular. His beef essentially or you tell me if I'm missing this is that if a crypto platform walks like a bank and quacks like a bank, then it needs FDIC insurance and capital requirements and liquidity rules and all that jazz. And the Clarity Act let crypto. What would you say to Jamie today?
Obviously, I can't speak for him, but what I would say is that, you know, we believe in level playing field and we're not engaging in fractional reserve lending. That's what you need a bank license for. Part of the reason banks are so heavily regulated is it's very risky what they're doing. You know, they're lending out your money and sometimes banks go insolvent. They go under. You know, we saw that with like Silicon Valley Bank and Signature Bank recently. People say, 'Well, it's FDIC insured.' Okay, but that's only up to 250K. If people are storing more than that, they're not guaranteed to get that money back. And because banks engage in such risky behavior, that's why they have bank licenses. Stable coin issuers, well, certainly Coinbase, but we're not an issuer of any stable coin. Stablecoin issuers, they don't do fractional reserves. So, under that Genius Act, which is now the law of the land for stable coins, they're not allowed to do fractional reserve. It's a 100% reserve. So there's no such thing as like a run on the bank in these regulated stable coins. The money is sitting in short-term US treasuries, say less than 90 days. So it's extremely liquid. Worst case scenario, if everybody wanted to withdraw their stable coins or convert them back to dollars at the exact same time...
moment, they could basically wait 90 days and have all of it back. Or in reality, there's a super liquid market for short-term US debt like that. I think that at the end of the day, a couple of the big banks who happen to have key business lines around this, they frankly just didn't want the competition. And the part that bothered me was that I think they really kind of went to the government to try to kill their competition. And to me, that shouldn't happen in America.
So, who should they go to? It sounds like you guys had a little run-in at Davos or something like they came to you directly.
What they should do is just compete. Compete on the level playing field. That's how consumers win in America. You shouldn't go to anyone to try to kill your competition. So, I think that's not how the game works in the US.
So, the beef has been settled with Jamie. You're ready to hug it out.
You know, I don't mind like a little, you know, heated rivalry. I posted like a funny meme about that. But, you know, the reality is we're working with JP Morgan on a variety of things. I like Jamie Dimon. I've learned a lot from him as a CEO. I think he's been incredibly successful. I don't like his stance on this one particular thing, but that doesn't stop me from overall having admiration for them and being willing to work with them as they've been very willing to work with us.
How does this affect Coinbase stock if at all?
