Morning everyone. I'm Brett Teal, the co-CEO of Coinbase Institutional, and I'm here from Davos. It's the first morning in Davos, and I'm here with Faryar, who's our chief policy officer, and we're going to do some framing and have a discussion on what's to come in Davos. So, here's the framing. We're coming in hot off a really successful week in Abu Dhabi for the institutional business. We launched some really key partnerships. We had bank partnerships with PNC. We announced a series of transactions and integrations with JP Morgan. We did the same with Standard Chartered. So there's a ton of institutional adoption that's going on. The crypto world is in anxious anticipation of the market structure bill. We were all set up. We were ready. We were going into it. And then our founder and CEO, Brian Armstrong, withdrew his support for that bill. And everyone wants to know why. So, we're going to open up a conversation and give some context around that. And then we're going to talk about our exciting week in Davos.
Faryar, help us understand what happened. I mean, the crypto world is so excited. We've got the stablecoin bill that has been a massive catalyst to really driving institutional adoption. We feel like maybe we were just on the one-yard line at getting this next big giant step, and Coinbase withdrew its support. Why did we do that?
Well, legislation is really important. And I think we saw over the course of the last four years under the previous administration that when you have uncertainty in the regulations, that can become a huge drag on the development of the industry. The Genius Act, which is the stablecoin bill that you were talking about, was not a perfect bill but it was a very good bill. And even in the five months since adoption, there have been something like 200 separate commercial announcements with companies integrating stablecoins into their systems and payments and their infrastructure. And so we looked at the market structure bill through that same lens. It didn't need to be perfect, but it had to be good enough to be a catalyst for adoption and development. And we weren't able to see the actual text until 48 hours before the markup, which is when the committee was going to decide whether they were going to endorse it. And we fundamentally made a decision that within it were some real deep problems that had to be addressed. Our industry partners actually didn't disagree with us on the substance of our concerns, but some people felt like the committee should proceed and then it'll get fixed later. Our own experience, and my experience having done this sort of stuff for a long time, is that it's very hard to unwind bad legislation. And so in the spirit of trying to get it right, understanding that compromise is necessary, Brian spoke up, and now everyone's back at the table. So I feel pretty good about where we are.
Well, I think we need to actually, for this crowd in particular, double-click a little bit because we really don't want people to think that we're looking for perfection. And in fact, there were some really, really substantive things that were introduced from our perspective a little late in the lawmaking process, but they're actually really big impediments to Coinbase. And I think it hits us a little harder given that we have this breadth of platform across both retail and institutional. And I'm not sure in the moment that people fully appreciated just how big the blockers were. So it wasn't a series of small things which in aggregate could be big. There are actually some really big things, like the SEC exemptive authority point. So let's talk about that.
Yeah. So there are about six things that caused us enormous concern. These are not sort of areas of compromise where you win some, you lose some. These were big fundamental things. And one was the SEC exemptive authority. Now, there's some dispute on the part of the staff about what they intended to put into the bill, but the language said what it did. And basically, it said that with regard to digital assets and tokenization, the SEC by law would be prohibited from providing exemptive relief. And I think the clients know, and I think folks who are in the sector understand that the way the SEC has always accommodated technology over the last 50 or 90 years has been through the use of exemptive relief. And so for the first time, there was going to be a bill that Congress was going to ratify through a committee that would statutorily take the exemptive relief authority away from the SEC, given how much Chairman Atkins is talking about providing, actually issuing an innovation exemption to allow for the tokenization of capital market activity, and most people expect that would be coming out in a matter of weeks. We thought it would be an enormous strategic mistake to have a Republican-led committee of jurisdiction in the Senate pass a law, or pass out of committee an act that would take away exemptive relief authority from the SEC right at the zero hour, right before the SEC is about to provide exemptive relief for tokenization. And I think that would have been an enormously difficult thing to unwind. And so we felt like we had to raise the concern. And then the second thing had to do with the banks were trying...
Sorry, can we just pause there for one second because I don't mean to interrupt. I just want to explain to everyone who's less familiar with all these terms of what that means. So we have Chairman Atkins, who's amazing, and he wants to see, and the SEC wants to see, innovation take place at an accelerated rate. And so one of the ways that this exemptive relief is giving us is as we think about which assets will be tokenized, we're not really at a point where there's a black and white determination over what is or what isn't a security. And so as we work through that as an industry and we go through a whole number of different things that come to market, one of the things that's super helpful is to have this exemption that sits on top that allows us, that allows innovation to actually continue and progress towards markets. And if we get to a point where something could be interpreted as a security, that gives the industry the ability to actually bring things to market. And so the withdrawal of that is a real impediment. And so that would in effect remove the ability to really move forward at pace and bring things to market.
No, exactly. I think that's well said. I would say, even framing out a little bigger, people wonder what the difference is between the US capital markets from a regulatory perspective and European capital markets from a regulatory perspective. So EU and UK, and if I had to pick one thing that was the distinguishing factor, the advantage that the United States has is the ability of the regulators to provide exemptive relief. So European regulators also look at opportunities where innovators will come to them and say we want to adopt this innovation into the market. Can we get permission to do that on a trial basis to see how it develops? In Europe, they typically do what's called the sandbox, and sandboxes are time-limited and scale-limited. In the US, what the US has always had is exemptive relief, which allows an innovator to invest heavily into an innovation subject to the SEC's approval through an exemptive relief grant, and then that becomes eventually something that the SEC can do notice and comment rulemaking. So, pass a formal rule. So, all of this sounds quite technical, but it's an enormous strategic advantage the United States has, and to have Congress take that authority away from the SEC would be a catastrophe.
Great explanation. Let's roll on to the next big thing.
Yeah. So, the next thing is on stablecoins. So, the Genius Act passed four months ago. The banks, a coalition of banks, stood up and they said, 'Well, we don't like what happened in the Genius Act.' In particular, they were concerned about the compromise that was struck with the banks that would prohibit issuers of stablecoins from paying interest or yield, but allowed exchanges or third-party distributors to provide rewards. Rewards and interest provided by the issuer are very different things. Rewards are paid out of the balance sheet. There's no commitment of ongoing return. So all of this is carefully capped. Then the banks came in and said, 'Okay, well, we will block, we will use our political power in Washington to block market structure legislation unless you agree to unwind the Genius Act that was passed four months ago.' Now, this is by Washington standards, and just to put it kind of mildly, a highly unusual thing to do, to have Congress on a significant bipartisan basis pass one of the president's signature achievements and have an industry show up three months later and say, you know what, let's unwind a significant pillar of that. And so, that was the second thing we held the line on.
I want to pause there and actually double-click on it because it's worth it. So, some framing for me on this is we talked about the Genius Act was the major piece of legislation that allowed stablecoins to enter the mainstream system of the US. And it was really that moment which served as the biggest catalyst, which I just talked about at the beginning, of having all the banks actually adopt us and want to push forward. And so as you mentioned, we have over 300 mandates for our crypto-as-a-service. And what that means is financial institutions of all kinds, the TradFi world, the bank world, they're actually, they may have a complicated position at the moment because they may be protecting maybe a part of their business, but at the same time, they're leaning into it and they're using Coinbase as the main platform by which they're activating. And so one of the things, as a student of markets for my entire career, I'm a big advocate of letting the capital markets decide. So there's not one stablecoin, there are many. And the US is a place where there should be open competition. And while I understand that vested interests of banking may want to be a bit protective of deposits or that sort of thing, we certainly don't want to have a backdrop of an American market that's anti-competitive or is ring-fencing things and not allowing actually innovation to proceed. And so I think if you see this sort of attempt to renegotiate what had already been passed, it puts a little bit of a dark light on and gives you a little bit more perspective on why we thought it was so important actually to keep what we've already agreed and then set the stage for further innovation and then really allow banks and crypto firms and emerging stablecoin providers and everyone that wants to compete in the space to design the next best stablecoin, or in fact we probably hope that people continue to actually use those stablecoins which have already gained traction and we're able to actually offer them across the platform, across borders, etc. So this is a really, really big point.
