Coinbase Institutional: From Policy to Action with Faryar Shirzad & Brett Tejpaul

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.

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...

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.

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.

Yeah. And I think your broader point is also probably worth restating. Coinbase is probably the biggest infrastructure provider to banks who are looking to get into tokenization and stablecoins. In fact, here at Davos, Brian Armstrong has meetings with, I think, four bank CEOs, four of the largest bank CEOs in the world, to discuss the ongoing partnership we have with them. You know, there are a lot of issues. My own experience, having been in Washington for a long time, is that you can have these sort of funny dynamics where you have the lobbyists and the trade associations and the DC folks get into a fight over something because they're just sort of accustomed to drawing lines where they've drawn lines, and it often requires the CEOs to come in and just sort of tell everyone to cool it and understand the broader picture. And so part of what we're trying to do with this is on the market structure bill with regard to where the banks are, is obviously work the Washington process but also to bring the CEOs in and say this is an opportunity for banks as much as it is for any other sector of the economy, and I think we'll get there.

Yeah, maybe I'll do one more. So in the US there's a very funny dynamic. We're the only country in the world that has two different market regulators. The two regulators, the SEC and the CFTC, are overseen by two different committees in Congress. So the banking committee in the Senate for the SEC and the agriculture committee in the Senate for the CFTC. And so when we pass legislation that involves comprehensive market structure issues like our crypto market structure bill does, it has to go through two different committees on two different bills that are taken up at two different times. And so reconciling the two becomes a really complicated exercise just as a matter of legislative process. And what you had with the banking committee proceeding is they were in a position where they were essentially saying that token issuers that were issuing a non-security token, in other words, something that would be regulated by the CFTC, would first have to go to the SEC, get the SEC's approval before going to the CFTC. In normal sort of Washington world, the other committee of jurisdiction would speak up and say one agency cannot be the front door to the second agency. We're co-equal agencies. For reasons we don't fully have our arms around, that didn't settle out in the normal process. But it was a terrible precedent to have access to an agency that has been in place for decades be conditioned on going to a second agency on a matter not related to their jurisdiction. And so we needed to clarify that. These things sound somewhat technical but I think our clients understand, operating in highly regulated markets, how important it is to get big fundamental principles of regulation right. And I think we'll get there. So I'm actually quite optimistic, although there was a little bit of drama last week in Washington over the legislation. You know, it's a process in the United States to go through a bit of a roller coaster before a new law gets enacted.

Well, as you said at the outset, the goal is regulatory clarity. And we're very lucky in the United States. We essentially have two paths in front of us. The one path that we've been working very hard on, but is unquestionably the harder path, is to get legislation passed that addresses some of these key principles that need to be resolved with regard to tokenized markets, digital asset markets. And we're very committed to doing that from a kind of a Washington systemic approach. There's a value in having Congress speak to an issue and the president sign into law a new regulatory framework for a sector. But we do have a second path which is to work directly with the agencies. Now that doesn't have the permanence of legislation, but we have an SEC and a CFTC and a Trump administration that's very committed to providing clarity through regulatory authorities that the agencies have. And so we see those things as very complementary. We're very committed to the legislative path, but there's a complementary regulatory path and we're working both of those. The reason I'm sort of going through all of that is there's no question we will find ourselves incrementally by the month, but certainly a year from now, two years from now, with dramatically clarified rules around how the digital asset markets operate. So I'm very optimistic about where we're going in the broader goal of regulatory clarity. There's a couple of different paths, very complementary, in front of us that we're going to take advantage of both of them. And I feel very optimistic about our clients, ourselves, everybody who wants to just kind of understand what the rules of the road are, all of that becoming much clearer even six months from now.

Yeah. And when I was at the CFC event and news of Coinbase having withdrawn its support for the bill, there was a lot of booing in the room. You know, I was with the whole crypto community. And you know, as the night unfolded and people asked me more about why we were taking this position, I think it became clear to our friends in the crypto ecosystem that we were doing the right thing for the business by actually tapping the brakes, taking a timeout and saying, 'Listen, we have to solve for the whole here, not just individual issues.' So, I'm personally super excited about where we head from here. I'm grateful of all the time that you've invested and you got to make it happen.

Can I add one more layer to your framing? I think when the internet came about, the big innovation, and when people began to understand the value of the internet, they understood it as an efficiency play. I used to have to send paper correspondence, I could now send an email, that was a big gigantic step change in how we were able to engage with each other on data, and the internet became really exciting. Looking back, it's all kind of quaint now because you have programmability with data on the internet. And so we have video, we have any number of applications including the development of artificial intelligence which is enabled by the technology of the internet. We're sort of at that very first stage of blockchain digital asset technology where we talk about it heavily as an efficiency play. Payments, you know, ACH or wires take three days, cost X amounts. Stablecoin payments can be settled in a second. Capital markets activities have atomistic settlement. And so we talk about it very much in efficiency perspectives. The reason why we take such a careful perspective, understanding compromise is ultimately where you need to go, and why Coinbase as a company invests in things like Base and layer 2 protocols and is so protective of the activities of developers, is that we're only at the very beginning of programmability. So we are seeing the benefits of digital assets from an efficiency perspective, but we're just at the beginning stages of seeing programmability where you can build any number of applications that automate existing applications not just for efficiency but to manifest in different use cases, and I think that's really, really exciting and important to keep in mind, and we try to put into the debate in Washington. But the bottom line is we're going to get legislation done. I feel very good about it. Democrats, Republicans, the administration, everyone's back at the table. Everybody understands the issues that we raised or the kinds of things that need to get addressed. We're working with the banks on my counterparts there to figure out something that's a win-win for them. So we'll get there, and it's the right thing to do.