The Clarity Act is all the rage this week and much of this centers around banks, DeFi, neo banks. All of this is coming to a head. Let's get into it today. I do want to thank our sponsor, Tandem. You can get into self-custody easily by going to tang.com to set up your secure crypto and hardware wallet. A lot of features are brewing within the Tang ecosystem. Check it out using our code for 10% off. It helps the channel. It's going to be a good show today because we're going to have Paul Grewal coming in from Coinbase to talk about where we are on the Clarity Bill battlefront. But before we bring him on, I want to do a quick recap to bring you up to speed.
Everyone is still dealing with the fallout of Coinbase's abrupt, very surprising decision.
Never a dull day. Coinbase CEO Brian Armstrong said yesterday that 'I'd rather have no bill than a bad bill.' Shaping Morgan stock is down more than 5%. The creation of a parallel banking system that pays interest is obviously dangerous and undesirable, and that is the core of our advocacy. We need good policy and we're going to be fighting much more for good policy this year at JP Morgan. Bank of America is off almost 6%. Look, we'll be fine. I don't worry about it. Do I think it affects the course of history of Bank of America? No. We'll be competitive. We're not going to do that if it harms ordinary Americans and gives away too much to the banks. So we're going to keep fighting for our customers' rights. While some people agreed with that decision, a lot of very important people in crypto pushed back pretty publicly today. 'If it's not perfect, who cares? We'll fix it in time.' Andreessen Horowitz publicly pushed back on what Coinbase said yesterday. Ripple also said, 'Is it perfect? No. But is it better than nothing? Absolutely. We are so close.' One source told me, 'Coinbase very much feels like it's on an island here.' My questions about the issue of the banks not wanting owners of stablecoins to receive a yield. I don't want to have a bullseye on my back. This is all being streamed. I don't want to drink coffee and get sick or something.
Oh man, Tom Lee, he's a character, that's for sure. Listen, I want to bring in Paul Grewal coming in from Coinbase. Paul, how are you?
Hi, Paul. I'm doing well. How are you today?
Excellent. It's been a big week for you guys. Give us a rundown real quick. You saw alignment across the industry from that clip. But can you give us an alignment on where the Clarity Act stands right now? What were the big issues that were the real sticking points for Coinbase?
Well, Paul, I think it's important to start by understanding why clarity matters. The fact is that we now have 52 million Americans or more who have bought or sold a digital asset. We have an asset class worth not just billions, but trillions of dollars. We need sensible rules for the road to allow this important technology and industry to continue to flourish. There's a lot that we've seen that has been very positive in the draft legislation now in the Senate. It took certain ideas from the Clarity Act that passed the House and expanded on them. But importantly, there were a number of issues that were not resolved at the time the Senate Banking Committee was scheduled to go to markup that we thought needed to be resolved for this to be a productive exercise moving forward. The reality is that US consumers' rights to rewards on their stablecoin deposits were a target. The banking industry made it clear they wanted to relitigate and renegotiate the careful deal crafted when we passed the genius stablecoin bill last year. We felt it very important that consumers' rights to rewards be protected. There were also significant concerns about the ability under this draft language for the SEC to permit tokenized equities to finally take root in the US, as well as concerns about DeFi and other issues. On balance, we felt it was important to hold true to the principle that a bad bill is worse than no bill at all, while extending a hand and making it clear we want to continue to work towards legislation, and we think we're going to get there.
Was there anything critical? Brian was pretty adamant about being in, and then it was all of a sudden. Where did the tide shift? Was it during the amendment phase? Can you explain?
I'm happy to. I think it's understandable if ordinary Americans who aren't living inside the Beltway every day are a bit confused by the process. In a general sense, what happened was that in the lead-up to the Senate Banking Committee, one of the two committees responsible for advancing market structure legislation, there was a release of the final text that would be marked up at a hearing on Thursday. The critical thing to understand is this is not a one or two page memo. It was a document that went hundreds of pages, something like 270 pages or more, into deep detail about all these questions regarding the right way to regulate crypto. We had effectively a day to work through those 200 plus pages of dense text and understand what deals had been cut in advance, how this would work in practice not just for Coinbase but for the industry as a whole and for our crypto community, and what this would mean for the ability of innovation in crypto to continue to flourish while important consumer protections were maintained. So it was the fact that an incredibly dense text was dropped at the very last minute, with very little time to work through it, and real red flags in the text ultimately led Coinbase to decide, and Brian articulated it well, that as much as we have worked on this legislation, thousands of hours, untold dollars, many trips to Washington, it was much more important to get it right than to simply take a bill for the sake of taking a bill.
Had this been dropped on you within, in a lot of cases, inside 24 hours? I've seen that with many bills we've covered over the years. Congress works a little tricky, especially if they're complex like this one. Would we be in a different position? Do you think the industry would have been bamboozled? How do you feel about that? What do you think would have happened?
Well, I think there's always room for improvement in process. I certainly think that more time and more opportunity to weigh in with legitimate concerns and hear the legitimate concerns of others who may have a different view would have helped in this particular situation and led to a better product. That said, the process was not the only concern. There were substantive issues regarding rewards, tokenized equities, DeFi, and the like. So with a bit more time now, it's clear we're not going to see a markup for at least the next week, perhaps longer. We can now dig into those details, work through our differences, and reach what I think will be a sensible common ground that ultimately leads to a bill ready for the president.
So let's look at it this way. If interest rates start to go down, because this has been a defense point for Coinbase and many people out there, we as a channel defend that position of being able to get your own yield within whatever platform you use. But if interest rates start to slide downward, is this a defensible position for Coinbase still, or would you forego that if it came to a drawing line in the bill?
Well, we've never viewed the current state of interest rates as a critical factor or even an irrelevant factor to the basic principle that US consumers who hold stablecoins have a right to share in the economics arising from those stablecoins. It strikes us as anathema to the entire spirit of crypto that issuers alone would be able to hold all of that yield for themselves and by law be prohibited from sharing those benefits with their customers. That would leave us with a circumstance no better than what we have with traditional finance right now. You and I, when we want to earn yield or interest from banks, have to make do with a pittance of a few basis points of reward while the banks collect percentages, many hundreds of basis points, from their own deposits at the Fed and elsewhere. So we need to fix that. This has gone on for far too long, but this is a unique moment and opportunity for us to provide competition to that arcane traditional system that puts consumers at a disadvantage.
It still surprises me that this was drawn into clarity. Obviously, with this being a pivotal consideration in the Genius Act that had already been made law, now we've got one of the strongest lobbies out there. I was surprised at how much money goes into the banking lobby. It's significant when you look at the rest of the crypto industry. I had anticipated that companies like Kraken, Ripple, even Robin Hood, I saw Vlad come on, they didn't really position out. Do you think they were also caught flatfooted, not seeing the real issues in the markup, or do you think they were in a different position? How do you see the market?
Well, I think we all were in a similar situation with very little time to react to the text. I think we all share a common goal as an industry of seeing more choice for consumers, more competition to the traditional financial system, and more alternatives for basic financial services that go beyond just investing. We want to see competition in lending and access to credit more generally. So there remains a core set of principles that the industry relies on. We may have different views on tactics and strategies, but I'm confident this industry can and will continue to speak with one voice on the basic principles that matter most: choice, competition, and innovation.
Let's look at the playing field. You've got TradFi now going head-to-head with centralized exchanges such as Coinbase. You also have a narrative brewing within this, and we've had Amanda Tuminelli from the DeFi Education Foundation trying to protect the idea of what's going on on the DeFi side. What is the situation right now around that? Do you feel like DeFi is in a position where it might be given up in this Clarity Act? With the things we saw coming out of this markup, it looked pretty risky for DeFi. What are your thoughts?
I think it was pretty risky for DeFi. For Coinbase, it's always been critically important that any legislation that passes Congress respects and protects the innovation that DeFi offers. The fact is that imposing onto DeFi protocols, DeFi frontends, and ultimately DeFi developers the same standards as if they were running a bank on Main Street is frankly nuts. These are not fractional reserve businesses that control or custody assets. This is ultimately about software and code, and we think it's critically important that distinction be respected. It doesn't mean we can't have sensible rules to protect legitimate national interests. For example, OFAC sanctions can be imposed in DeFi as effectively as in traditional finance, and we would support those efforts. But it can't be the case that we simply graft onto an entirely new technology and innovation rules that were developed decades ago for a very different approach. It's in that spirit that we have pushed hard and will continue to push for a basic recognition of that important distinction while accepting that we all share a common goal of keeping people safe and ensuring consumers understand what they're getting into and have the opportunity to do so on a non-discriminatory, equal access basis.
You look at some of the rhetoric coming out of DC. This is Amanda Fischer from Better Markets: 'This entitlement, unwillingness to compromise explains a lot about Coinbase, unwilling to register with the SEC in the last admin.' I thought this was over. I thought we were done with these kinds of people not realizing that our industry had been on so much fire. For us to be a little gun-shy, I think is understandable. How do you see the rest of DC? Is it still this way?
I couldn't agree with you more, Paul. I think unfortunately some of these unserious voices continue to try to insert themselves in a debate that has long since passed them by. The fact is we now have the most pro-crypto administration in history together with the most pro-crypto Congress in history. In that environment, not only can we expect that we're going to have a fair shot at coming in and registering in the way that Gary Gensler promised but clearly had no interest in, but also crafting sensible rules that balance protecting investors and consumers with promoting innovation. I think that goal is now shared among all the important stakeholders in Washington, and it's achievable if we just keep our focus.
Listen, we played a clip yesterday from Jamie Dimon during the earnings call for JP Morgan. They defended their position, and he came on the clip almost in a bit of a panic mode when they were talking about defending banks' position. When you look at the size of the banking industry, it's really controlled by about the top 20 banks. But do you think that community banks are being used as a shield by the major banking industry right now to clump it all together?
Well, I think some of the concerns about community banks have certainly been misrepresented. It may be the case that community lending is in decline or at some risk of decline in recent years, but that's not a function or result of the proliferation or development of stablecoins. Quite the opposite. The only serious studies ever done on the effect of stablecoin adoption on community lending suggest it has had no statistical impact whatsoever on that important function of community banks. In fact, when the big banking lobby likes to argue that the Treasury Department, for example, has suggested otherwise, they point to a study or paper drafted by the banking lobby. So it's a bit of a red herring. The fact is community banks do play an important role in our country, and we want to continue to see them thriving. But if they are suffering struggles and challenges in the current economic climate and competitive environment, that's not a fault or result of anything coming from stablecoins. There's just no evidence to suggest that.
You've had a chance to see all the evidence coming at this committee and the rest of DC, probably on the front lines. Has there been any compelling argument that would make you change your position on banning yield for stablecoins? Have they come to the table with anything that would remotely put that at risk?
