Now With a Stablecoin Yield Compromise in Hand, Could Ethics Hold Up the Clarity Act?

Transcript

Hi everyone. Welcome to Unchained. Your number one hyper resource for all things crypto. I'm your host, Laura Shin. >> [music] >> Thanks for joining this live stream. Before we start the show, we'll hear a quick word from the sponsors who make this show possible. This episode is brought to you by Adaptive Security, the first cybersecurity company backed by OpenAI. As AI makes deep fakes and synthetic identities easier than ever, Adaptive helps companies test and strengthen their defenses. Learn more at adaptivesecurity.com. Today's guest is Faryar Shirzad, chief policy officer at Coinbase. Welcome, Faryar.

>> [music] >> Hey Laura, thanks for having me on. The fight between the banks and the crypto industry over stablecoin yields in the Clarity Act uh is basically settled, I think. Um it was said The Clarity Act is supposed to be about everything but stablecoins in a way or at least for kind of centralized uh crypto activity. Um but yeah, this is what's been holding it up and we do have new language which says, quote, "No covered party shall directly or indirectly pay any form of interest on yield, whether in cash, tokens, or other consideration to a restricted recipient A, solely in connection with the holding of such restricted recipients payment stablecoins or B, on a payment

stablecoin balance in a manner that is economically or functionally equivalent to the payment of interest or yield on an interest-bearing bank deposit." So, explain what that means and whether you feel that this language is a win for the banks or the crypto industry. Well, it's um it's a really good question. The language is complicated, but let me maybe just to simplify it. There was a few things that the banks said as the you know, kind of as the process wound through over the last few months.

And their fundamental argument was that stablecoins will cause deposit flight largely because some there's something about a stablecoin that in their view mimicked a bank deposit. And so the core issue that they were trying to get in the in the Clarity Act was essentially a change to the substance of the genius act uh that had otherwise allowed a third-party intermediary like an exchange to pay rewards uh to a customer simply for holding a balance. And so the big thing the banks were able to get done on the substance of how stablecoin, you know, stablecoin reward is structured is that they were able to get a restriction so that the reward can only be paid if there's some

activity that the customer engages in that then qualifies that customer for getting the reward. Um um they were also they were able to get a bunch of things in there regarding marketing restrictions and disclosures and studies and what have you. We felt comfortable in the end that we could live with the compromise uh because um for a couple of reasons. One is rewards are protected. Two, um it does have a fairly broad um parameter in terms of determining when an activity is sufficient for a customer to qualify for reward. And third, um once the customer does qualify for the reward, we're able to calculate the reward based on the duration of their uh holding of the stablecoin and the

balance that they have with us. And so, you know, it was it was very much of a compromise. You know, obviously enormously frustrating uh to us in the crypto sector because rewards are critical for adoption. This issue was hashed out in the genius act. The fact that banks would want to revisit it on the back of the Clarity bill, you know, was obviously something that we felt was um a bit of a uh you know, not fair play. Uh but in the end of the day, politics is politics and we feel good good about what we were able to preserve and uh we feel like it's workable with regard to our our program at Coinbase.

Yeah, it to me it seemed like they were holding the Clarity Act hostage to try to re-litigate something about genius. Um I did want to ask you a little bit about that rewards that um so the additional language about rewards says that they may be calculated by reference to a balanced duration tenure or any combination of the foregoing. So I'd love to hear the different types of activity that you think we might see in the crypto industry in terms of what they can or could potentially offer to their customers given that language.

Yeah, I don't have the statutory language right in front of me Laura, but there's a enumerate enumeration of the types of activities, but I think it's it's non-exclusive. So essentially there has to be some meaningful commercial activity if I recall that the customer has to engage in. So it doesn't you know for for a while the banks were arguing that there should be kind of a transaction-based rewards. So you spend a dollar, you make a dollar payment, you get 5 cents back. It's much much broader than that. You know the customer can engage in you know trading activity, custodial activity, any number of other things on the exchange as long as the you know the activity is of a sufficient you know

commercial and economic kind of you know quality then the the customer just qualifies. Some of this will have to be worked out in the rule making. So obviously you know we we we feel comfortable with where we are with round one, but we're have to figure it you know have to kind of make sure that this lands well in the rule writing process as well. Okay. Yeah, I think staking was another one that I saw as an example. So if this bill gets signed into law then is there a possibility that between now and then the language will change in some fashion or is it just like now that this negotiation is over, we could expect that there won't be any more revisions?

Look, we don't take anything for granted. I mean, legislations you know, it's never done until it's done. And even when it's done, you can have situations like we have here where people will try to revisit legislation in subsequent legislation. So, I think you know, there's a degree to the degree of weariness that we are you know, all of us who've been around Washington kind of bring into these processes, but the two big key architects of the compromise were Senator Ossoff Brooks and Senator Tillis, both of whom took the bank arguments quite seriously. Uh and you know, brought that to the table as they were trying to figure out what sort of compromise we could reach. Um the banks you know, spoke up after the the the two senators released this the compromise language. Um and the the senators came

back and said, "Look, um uh we're we're we're we're defending this compromise. This is the right way to balance the equities between the different interests that we're trying to manage." Uh and that's a very, very powerful uh statement uh for them to make. So, we feel good that we're in a good position, but you know, the banks have been um you know, have have a pretty comprehensive strategy I think against stable coins was from what I can tell. Um uh so, they're not going to let this issue rest, but we're going to defend what the president was trying to do in having tokenized payments, dollar-based tokenized payments issued out of the United States under US oversight become the predominant payment instrument in

the on-chain future. And reports are a critical piece of that. And I think the administration's going to be quite protective of making sure that the whole kind of one of the core pillars of the genius act isn't undermined uh you know, uh because of this uh because this effort by the bank lobby groups. Yeah, yeah. I mean, it just um from a voter perspective, it seems um and just like anti-consumer to say you should not get yield. Um, but the banks are still doing it. So, after the negotiation language was, you know, uh agreed upon, the American Bankers Association, the Bank Policy Institute, Consumer Bankers Association, Financial

Services Forum, and Independent Community Bankers of America issued a joint statement that said, among other things, quote, Senators Tillis and also Crapo are seeking to achieve the correct policy goal, prohibiting the payment of yield and interest on stablecoins. I found that funny. However, the proposed language falls short of that goal. So, um, are you seeing that they'll like continue to keep fighting this in some fashion? And if so, what does that fight look like? Is it like taking it to court or yeah, how do you expect that might happen?

>> [clears throat] >> Well, I mean, I think they'll they'll do several I mean, well, you know, you'd have to ask them what they intend to do, but they'll, you know, I presume they'll go around the hill. Um, you know, the bank CEOs will probably get involved. You know, any number of them were in town last week. Um, so we'll see. We'll see what they end end up doing. Um you know, it's it's a 15-round heavyweight championship fight that we're in. Um you know, the early rounds have uh gone some have gone our way, some have gone their way. Um, but I think we'll I think we'll work it out. I think I think what's happening at this stage, so Laura, if I would say, is one of the things that has been a consistent dynamic in a lot of the other issues

that have been open in the legislation is that is the fact that uh in a way um, even though there's been a fair amount of press attention, it's all of this has been happening kind of behind closed doors. Uh we're now likely to see the Banking Committee, if the public reporting is accurate, announce a markup on uh Thursday of next week. You know, you're seeing the White House gearing up, the Treasury Department gearing up. Um, you know, once you get kind of the big sort of significant mega players, including the President of the United States, [clears throat] engaged on this, it's going to become really hard for a group like the bankers to come in and uh, to uh, and more visibly be taking on the administration. I I I

think that's actually been one of the interesting stories that's been underreported is that I can't think of another industry that has more more directly taken the President on um, one of his core policy objectives than the banking industry has, even at a time when they're getting a lot of benefits from the administration. Um, I think they've they've been managed to thread the needle pretty well in what they've done. Uh, but I imagine at some point the um, you know, that'll be hard for them to sustain once the President begins to understand what's happening. Okay. So, I am also hearing that some lawyers think that there's a certain phrasing they're seeing in the language that could become contested or this is where maybe the banks will focus their

their efforts, which is this phrase um, on whether the payment is economically or functionally equivalent to interest in a bank account. And I wondered if you had thoughts on like which types of activities um, that you think the banking lobby might go after in terms of, you know, what they might view as being economically or functionally equivalent to paying yields. Well, the rule making is going to have to decide this. I mean, there's just a lot of hedging language in there. Um, this is going to be the lawyers' full employment act uh, going forward. Um, I do think uh, when you do have kind of complicated language like this, um, the agency ultimately does, you know, obviously

have to give effect to the language that Congress uh, enacts, but they also have to uh, read it in the context of what um, the objectives were that Congress was trying to achieve. And so, with the genius act, their goal was to uh, promote adoption of stablecoins issued in the US under US oversight. And uh, similarly, uh, the legislative history on this is going to be quite clear that the purpose of the compromise was to find a balance between the banks' concerns about deposit flight and, you know, the desire of uh, policy makers to um, to promote adoption of uh, of the on-chain economy including the US dollar issued in the US as a settlement

instrument. And I mean, the mechanisms necessary to promote adoption which includes rewards. So, uh, I feel good about where we're going to land in this, but it's, you know, it's it's a lot of work. Uh, and, you know, the various interest groups have a lot of resources they're going to throw at this. Uh, and we're, you know, we feel quite good that, you know, we have the substantive and legal position to defensive, but I think also consumer adoption and uh, broader economy-wide adoption of stablecoins will make this fight look look kind of uh, a bit anachronistic in the in the rearview mirror once you see uh, you know, how much how much adoption there has been. I mean, I think that's the interesting story, Laura. I don't know exactly how genius compares to other

pieces of legislation, but by our accounts, there were something on the order of 550 150 to 200 separate stablecoin projects that were announced even since July when the president signed uh, the genius act. So, the adoption is happening. Uh, and and I think that, you know, once, you know, once market practice, consumer adoption, um, and what have you starts adapting to a certain product or technology, you know, policy makers have to be careful not to, you know, um, do a 180 in terms of the you know, the public's ability to use an instrument that they're they're flocking to.

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based on cardholders' assets on Coinbase. This episode is brought to you by Adaptive Security, the first cybersecurity company backed by OpenAI. As AI becomes more capable, attackers no longer need to break into your systems. They just need a convincing imitation of someone you trust. That could mean a deep-faked voice on a call, a synthetic co-worker on Zoom, or phishing emails written by AI that are nearly impossible to distinguish from the real thing. Adaptive's platform is designed for this new reality. It runs deepfake, vishing, and AI-generated phishing simulations, so your team can see exactly how these attacks work and practice responding

before it happens for real. Their AI content creator also turns new threats or compliance updates into interactive, multilingual training within minutes. You can learn more at adaptivesecurity.com. Back to my conversation with Faryar. It's funny that we have spent so much of trying to get clarity over the line on this issue that involves stablecoins, which is supposed to be the GENIE Act. But anyway, the the fact of the matter is, you know, GENIE is was supposed to be and still is the much bigger bill. It covers so much more than what GENIE was supposed to cover.

And so I'm just wondering now that so much time has been spent on a an issue that frankly didn't have to do with clarity. Like, do we have enough time to actually get clarity over the line? You know, what kinds of um areas do you all still need to come to agreement on in order to, you know, have a piece of legislation that you are comfortable uh you know, sending to a vote and then being signed? That's a wonderful question. I mean, um part of the problem um or you know, I guess you could say one of the problems or one of the dynamics of uh crypto legislation is it's it's it can be so complicated that it's hard for uh policy makers who aren't just expert

in this to kind of get their arms around it. And so you find a lot of attention being paid to issues that are maybe a bit more intuitive like the rewards issue or, you know, there's a debate on president, you know, having some sort of ethics provi- government ethics provision added to the bill. You know, so sometimes you'll find the issues that are a little bit more intuitive um get a lot of attention because folks get their arms around them. But the the bill, like you're saying, is a hugely consequential bill. It's essentially sets the stage for the second state second generation of the internet to kind of become adopted economy-wide in our country because once you have clarity for developers to be able to

build blockchain-based applications and to have some have legal certainty about what their economic exposure is. So both with regard to the listing issues that matter to an exchange like ours, but also with regard to developer protections. It's it's it's enormous the the consequential nature of what is being done. And so in a way I'm fine having the arguments around rewards or, you know, any of the other issues that are are cropping up because in a way it tells you that the core aspects of the legislation are now essentially settled and and that's one of the big values that

legislation has is because once you have, you know, Congress acting on a piece of legislation, it's it's as much of a legal exercise as it is a as a political exercise that you have the, you know, kind of the on a bipartisan basis the the the the the legislative branches of government so and the executive coming together and kind of declaring you know, what the ground rules are for a new, you know, you know, in this case a new area of technology and that's really really powerful. And so you mentioned the ethics piece. I believe that that is still an area that needs to be worked out. Are there any other areas that, you know, could potentially hold up clarity?

Well, there are the issues started were getting settled bit by bit. You know, there are a number of issues that Brian raised in in the in the tweet that he put out before the last banking markup, um which, you know, we felt quite strongly about. And I think with time, um I think Brian's, you know, willingness to stand up and kind of call attention to them has been vindicated because I think many of these issues are being served or being addressed. So, for example, uh you know, one one question had to do with the um you know, the SEC's ability to see to continue to provide exemptive relief to digital assets uh rule, you know, any projects involving digital assets. Uh

it sounds like a bit of an obscure issue, but uh you know, there was a risk under the old version of the banking bill that the SEC would be uniquely constrained on providing exemptive relief with regard to crypto assets in a way that it isn't with any regard to any other asset class. That would have been a catastrophic move. It would have been a kind of a you know, kind of a uh you know, undermined the president's crypto agenda at large. Uh and that has as far as we can we understand has now been resolved. Uh there was an issue Senator Cortez Masto has raised with regard to a particular area of criminal um statute, Section 1960, uh which involves money transmitters and whether that provision could be,

um you know, potentially applied to to kind of decentralized DeFi applications. Our understanding is that's coming to resolution. Um there was the issue of the SEC, what's known colloquially as the SEC front door, about whether uh and under what conditions you'd have to go to the SEC to get essentially certification that a crypto token is not a security before it can be listed, you know, at the SEC or otherwise. Uh we believe that's been resolved. So, we'll have to see the bill text when it comes out today or we're told it's going to come out today. Uh but we feel like, as far as we understand almost all the issues have been resolved. I think 1960 is our understanding is the only outstanding

issue, but we'll see when the actual bill comes out. And then ethics, which is a is a harder issue for any of us in industry to speak to because it deals with you know, government ethics. It's not even as far as I understand a banking or act committee issue or jurisdiction. And so, this is far above our pay grade and something that you know, we hope gets worked out in some fashion between you know, the negotiators, the administration, and you know, anybody else who's who's kind of in that process. Oh, okay. So, that part of the language doesn't necessarily involve you so much.

It's sort of out of the hands of the crypto industry. It's just like other people are going to work on that. Well, so it's a as far as I understand it's an amendment to the government ethics rule. So, it creates creates special rules for government officials in terms of how they interact with crypto assets. I mean, our interest is obviously is that it's critical for officials in government to be able to you know, have have an you know, hold a crypto account, hold Bitcoin, uh be able to hold a stable coin. So, there's kind of kind of you know, um basic aspects of the um you know, using crypto as a financial asset and a financial service that I

think it's critical that the negotiators solve, but I know there's kind of a more politicized um um you know, question about how these rules will be crafted around the president. And these are again something that we have nothing, you know, we we can't really contribute to those discussions and and uh you know, as I said, they're way above our pay grade. So, we're sort of approaching them with a with the proper humility in terms of whether we have anything to add. Yeah, I mean, it's such a sticky question because basically, um you know, I have this thesis that right now crypto is a subculture, but someday it's just going to be finance. Like it's just eventually just going to be the financial system. So, to have some kind

of like real blanket ban feels just strange for that future day. But like right now when it's smaller, it's it makes sense to have some kind of but you know, ban is probably the wrong word, but like some sort of consideration because it is true that, um, yeah, without going into too much detail, I do think some of the things that are going on probably aren't really the best. >> [laughter] >> Maybe the way to put it. So, it almost feels like it needs to be like time-based or adoption-based or just something because like at a certain point if it is a blanket ban, it's just going to seem very strange to not have any government people who can participate in like a huge part of the financial system. So, anyway, these are just my thoughts.

Um, but I was >> I agree. I mean, it's like saying that, you know, Treasury officials can't have checking accounts or >> [clears throat] >> uh, you know, officials can't have, uh, you know, uh, you know, a 401k or something because, uh, you know, the the, uh, you know, the uh, their 401k is invested in in a security or something. I mean, it's it just gets, um, it gets ridiculous. And if they're worried about, um, wrongdoing, um, I presume they can figure out rules around whatever it is that they're, you know, kind of the behavior and not necessarily the asset class. But again, this is so far beyond our you know, abili- you know, ability to

speak to authoritatively. So, we we we hope that the issue lands well and and and it's, you know, it's also important to underscore, Laura, this bill is a bill to provide comprehensive regulation around the crypto sector. So, in, you know, it still drives me crazy how much you see out there from crypto critics uh out there who who want to punish crypto by preventing regulation that being implemented that provides rules and regulations. And it's kind of it just shows how much kind of political debate can be silly sometimes and and the core of the bill is a big regulatory framework and that's probably the best thing anybody can do if you're worried

about you know, bad behavior in the sector empower the agencies uh and give them rules that work so that they can then police bad behavior when and when and if it it occurs. Yeah. Yeah. And what's so interesting is like sometimes just random people who don't know much about crypto will say things to me about how now that Trump is in the administration, now the crypto industry wants all the rules unwound. And I'm like, wait, wait, it's no, no, they don't have any rules and they want rules. >> [laughter] >> But anyway, so I I heard that so many times and every time it just drives me a little crazy. I'm like, you clearly don't know anything about what's going on.

Um but I am really wondering because, you know, I don't think President Trump would love to have ethics language in there. I don't know. That's just my take. So, do you have any sense of how likely it is that he would either sign or not sign based on you know, like like do you feel like if it includes ethics language that it makes it more likely that he won't sign clarity into law? I just don't know. I mean, what I do know is the two senators that are negotiating uh the the language are Senator Moreno on the Republican side and uh Senator Crapo on the Democratic side.

Um they're both really smart and they're both very practical and Senator uh Uh, Moreno in particular is very close to the White House and the president. So, my understanding is that the White House is being quite the administration being very constructive and kind of looking at ideas and then you've got probably the two best people in the Senate to negotiate this uh handling the matter for the Democrats and the Republicans. And in particular on the Republican side, you've got an extraordinarily talented senator who is um you know very close and has a lot of credibility with the administration. So again, that happens is beyond my pay pay grade, but

the the pieces uh feel pretty good in terms of who's at the table. Okay, and the and so the Republican is Tom Tillis and then the senator the Democratic senator is Angela Alsobrooks? No, that's on the banking rewards. Yeah, on ethics it's Gaetz and Moreno. So Moreno is Republican side. Okay. So, um I was curious also and this may just not be decided yet, but um if there is an ethics clause included, do you know if it would be something that would require the Trump family to maybe like divest of their activities with World Liberty Financial or American Bitcoin or anything like that?

Uh, I just don't know. I I can't speak to that. I haven't seen the language. I um uh yeah, so I I I have no idea. Okay, yeah, cuz it raises the question of well, so you know, you could have language for once it's in law, but then what about the existing activity? Um all right so if clarity so okay, so I I just want to uh play play this out. So if clarity doesn't get passed, so clear so right now there's a stated goal of having it signed into law on July 4th. Yeah. Um but so if if we don't meet that deadline, then do you Do you

there's a chance it would be signed into law before the midterms? Um Or is it just kind of too late? Or yeah, what are your thoughts on that? I feel pretty good it's going to get done. I I you know, we're obviously watching to see if the Banking Committee announces the markup for May 14th. Um Senator Leader Thune has I think said or his team has suggested that they'll be able to give the bill the last 2 weeks of June to to get it through and and then you know, that would allow everyone to meet that July 4th deadline.

So, I think I feel very good about the bill getting done. I think Democrats, Republicans, I think everybody just wants to get this off the table. You know, there's some issues in Washington that you can kind of abandon and they just kind of go away quietly. I just think the crypto uh legislation, there's so much energy and attention that's put to it. I just think it'd be a big mess if it doesn't get done. Uh so, I feel I feel pretty good that we're going to get it done. But if by some chance it doesn't you know, happen this summer, I think people will continue to work at it. But I also feel good that you've got um some of the most extraordinarily regular extraordinary regulators at the SEC, CFTC, at the bank regulators um who are moving really pretty um you know,

uh assertively and thoughtfully on how to allow for the integration of tokenized uh financial instruments into our economy. And so, I think there'll be a lot of really good work done at the agency's level as well. I think legislation's good because there's a durability to it. Um but but I think there's an administrative path that will will take place as well, which I think is really important. I mean, the last thing I would say is remember in the house you had 2/3 of of of the house including almost 80 Democrats who voted for the for the legislation. That's a pretty big validation of the legislation.

That's hard for, you know, the Senate just to kind of abandon them. So, I I think they'll get it done. Okay. Um well, I do still want to ask though just in case it doesn't. Um do you think that the odds that you could get it passed after the midterms um would still be somewhat high? And then if it just doesn't get passed at all, like what do you think that would mean for the industry and for the US like in terms of global competitiveness? Look, legislation's always um a exercise of uh hope over experience. You know, I've been I've been at this for my entire 5 years at Coinbase and for most of this 5

years, lots of smart so-called smart people have said, "Oh, legislation's never going to happen. It's too hard. It's too hard." And the answer to that is yes, it's too hard, but you just have to press and press and make the case on the substance and on the politics, which I think we've done a good job of as an industry and as a community. Um so, if it doesn't happen in the summer, it's going to be a lot harder to do it in the fall, but I've been involved in my previous career in lot in lots of hard legislation that gets done close to election day. So, I would keep pressing at that point. The lame duck could be an option. Next Congress could be an option. So, I think um you know, we're never we're not going to go away on this issue. We're going to keep

working at it. And if it doesn't happen, let's say by some chance we know that it'll never happen, uh we will work with the agencies who I know um are very thoughtful about uh how they want to go about providing the clarity that uh you know, the 50 million Americans who own crypto deserve and all the companies and financial players who want to tokenize uh the financial markets more generally deserve. And so, we feel like a lot of good work will happen even without legislation. Okay. And so, let's be optimistic and and hope that it gets passed. Um if it is passed, then where would Coinbase focus its policy efforts next?

Well, we still have to get tax legislation through. Um so uh that doesn't get a lot of attention, but it's hugely important. And so we're hopeful that we'll be able to get also get tax clarity done, which will essentially provide parity for the treatment of crypto assets with with um with other financial assets. Uh but we're also have huge amounts of rule making in front of us um with the measures that are already in front of the agencies, you know, genius rule making, um work that the CFTC and the SEC are doing.

And um and that will be as big or bigger than legislation. A little bit more technical, but as consequential. So, we'll be very busy. Plus, Coinbase is a big global company. We have huge ambitions around the world. And um so we're working in the UK, EU, you know, Singapore, UAE, you name it, uh to get the rules right there as well. And so, we're deep in that um at the same time. All right. Well, Faryar, it has been such a pleasure talking with you. Thanks so much for coming on Unchained. Uh thank you, Laura. Thanks for having me on.

And thanks to everyone for joining this live stream. We will catch you next week. Bye, everyone. Nothing you hear on Unchained is investment advice. This show is for informational and entertainment purposes only. And my guest and I may hold assets discussed on the show. For more disclosures, visit unchainedcrypto.com. >> Mhm.