Sam Kazemian on Why the Clarity Act Is Still a Win

Transcript

Welcome back to StableUp episode number 25, powered by our friends over at Frax with their genius compatible stablecoin FRX USD. We've got none other than the Frax founder himself, Sam here with us. Lot to talk about this entire clarity structure, Coinbase. We were just in DC. There's a lot going on, Rob. Sam, it's great to have you back. How you doing, man? I'm doing great. Thanks. It's uh it's been a while. So, you guys are doing the DC circuit this time, huh? Yeah, we did last week. >> were in DC last week, DAS this week. So, I got a suit on and he's got a button-down on. We we miss you, man.

Yeah, yeah, I know. It's uh you guys are you guys get the baton handoff. I like I was just thinking the other day that like for for genius, I basically like lived in DC in like March of >> Yeah. last year and uh you know, now there's a lot of exciting stuff in in Frax that we're building uh in stealth and just uh in in the uh in the lab, so so to speak. And uh eventually the the baton will get handed off uh to to me, too. But, uh you guys are holding down the fort. >> Well, well, Sam, you laid the groundwork so that we could go there and we had plenty of material to cover. Um obviously, the latest is that, you know, we we had uh the the latest resolution or debacle. I I was saying just before

you joined that, you know, the politi- it feels almost like the politicians sold it I'm and I'm curious how you how you're seeing this. To me, it feels like the politicians sold us out. They said, "Hey, we have this great resolution on yield as it pertains to clarity." Um the great resolution is that there's no yield on stablecoins. Don't you guys love that? Um but, this doesn't feel like resolution. It just feels like the banks won and no crypto founders are going to sign off on this. I Is that the right way to think about it? How how are you reacting to the latest resolution, air quotes, uh coming out of DC? Yeah, so I'm I'm following it pretty closely.

But, one thing to put in context, honestly, though, uh for people that aren't really thinking about it is this is pure politics, right? So, this is not going to stop with this yield thing or even after clarity. And And what I mean by that is like, you know, I I don't know if most people watching this are Americans or not, but like, you know, there's a there's the Second Amendment in America, the rights to bear arms. And for example, this the right to bear arms thing is always going back and forth between people on the side. It's not like, "Oh, this one act passed and now everyone's done talking about it, right?" That's why there's like these lobbying groups on both sides. No matter what you think about the, you know, the Second Amendment and stuff like that.

I'm myself slightly pro for it and and and things like that. But regardless, whatever you think, right? So, one thing is like they pass it that says, "Oh, you can't have magazines for for like guns that that are above this, right?" And then if it's passed, the next one they'll be like, "Oh, you can't have guns that are this long, right?" And then it's like, "Then you can't have guns that look like this." And so it it slightly goes forward and forward. And so, that's just how politics is. It's not It's not about like stablecoin yield and all this stuff. The main thing with this is it follows the same pattern. So, with Genius, it was almost a resounding victory thankfully last year where the only compromise was the issuer could not give

a certain like legal claim or expectation that you holding this Genius like compliant stablecoin like like ours like, you know, Circle's eventually going to be in all of these like PYUSD and stuff. The The issuer could not say that holding this thing gives you some kind of legal right or expectation, which is fine. Like very few issuers were were going to straight-up say that, but you could give it to a distributor, right? Like a centralized exchange partner stuff and and have them give and distribute yields. Now, this is actually that's essentially if this is the current wording, right? That's essentially kind of banned. You'll You'll have like certain things where it's like activity-based

kind of things where, you know, Coinbase will have to think about. They can't say USDC like earn but by just by holding. They'll have to say like, "But if you log in and and like make a trade or or something like that." And and the the architecture of it is important to realize. After this, let's say this does pass like this, which is not good. I I hope uh it doesn't pass. But if it does, then in a different administration or like a different SEC like uh thing, right? If if it's not like pro-crypto, then they'll be like, "By the way, by activity, we're releasing guidance where activity means that you can't do an unsubstantive economic reality." They'll

they'll basically say, "You you can't do like logging into the thing or you can't do like this or that or whatever." And so, I think people uh need to understand. That's why I was saying you you guys can pass me the baton, hopefully, later. Like, this is not going to end in some kind of I think the crypto industry is kind of uh you know, they're they're not politicians or they're not like used to, you know, uh the fact that this stuff is part of, you know, politics is an ongoing process, not a uh one-and-done thing. And so, I think ideally, this is not the final wording, but it to be honest, it's really good for DeFi uh strong stable stable coin teams like like Frax and not that great for the

ones like, you know, Coinbase and USDC's like earn program and stuff that are constricting uh are constricted a little bit more. Um and in in fact, like I think the two biggest winners uh other than in this wording, probably the the the banking lobby, right? It would be Tether, uh right? Cuz cuz Tether is crushing it and they don't pay yield historically. And now it got harder for their competitors to pay it in an open-ended fashion and then also defy strong teams that have genius compatible stablecoins like Frax USD where we actually have these partnerships where if you peg to Frax USD and curve peg keeper pools we have this big thing coming up with Ave V4 that's launching

uh next week where we stream the actual risk-free yield as like a base of of the floor uh of it and so Frax USD is going to be one of these big uh base um hub blending and and and borrow assets and things like that and I think that benefits us a lot cuz we already do activity-based risk-free yield streaming but you know uh it's it's not the best wording that's for sure. Yeah. Yeah, so so you're pretty confident then that because it's just kind of like an evolution of of politics in this way they're just going to you know they're just going to keep inching inching inching until they take uh you know a full mile. You are you confident then that Brian Armstrong from Coinbase side

is going to hold off on getting this through because right we we had a conversation with the uh CEO of S uh Solana Policy Institute and basically he was saying look at some point we're going to have to accept a trade-off either trying to get this done before kind of like July-ish because all of Congress is going to go out and kind of do their whole you know run around for um for their next elections. So we either need to get this done and make a compromise sooner or is it going to get pushed back all the way until later in 2027 likely. So do you think that that Brian is going to um try to get this through quickly or push back? I think some news just came out that he's not

going to and Coinbase is going to oppose this. He was in in opposition to it which is I think expected um and and maybe just you know a similar question in in different words is you know does Brian even have the power to sign off on this cuz it my understanding is that he doesn't, right? It's mostly the politicians that can push this through regardless of what crypto industry thinks about it. They just don't want to piss off their donors. Obviously, they have donors on the banking side and they have donors on the crypto side. So, they don't want to piss anyone off, but if push comes to shove and the politicians are getting a lot more donations from one side than the other, they'll just go ahead and push something through.

Yeah, I I think So, so I I don't know exactly how hard Brian can push, but he is a he is a big guy. He is the elephant in the room from from the crypto side. But, it's funny because I think everyone in the crypto industry is discovering what what like pork is and like an omnibus omnibus bill is like which is like this huge bill and then pork means like small things added to it whether it's for spending or or other things. And like this yield clause, by the way, is an amendment to the genius act. So, it's it's literally by definition Well, I I don't know if it's by definition pork cuz I think it has to have additional spending in it, but it's literally like an additional thing in

there, right? In a huge clarity act kind of like an omnibus bill of of sorts. And so, I think the best thing to do is to kind of take the half W half L on the on the yield stuff and and just pass the clarity act because it is a huge bill that there's a lot of other Obviously, there's a lot of other problems that could be like perfected, but the again, politics is you know, all of this stuff. You can never get everything you want. The genius act was close. The genius act was very very very close to as perfect as you could possibly get, which is why they're trying to amend it and and and things like that. But,

based on midterms and you know, who knows what's going on with all of this like macro war and and and stuff like that, I think it's very very unpredictable if this doesn't get passed by, you know, July like you said like recess, which is the same thing with genius last year, right? They were trying to pass it. It got passed in July, right? So, I think this is probably the last or second to last revision. I hope it's a little bit better. But again, it's really good for DeFi strong teams. So, we're we're pretty excited about it at Frax regardless if they can just pass the the Clarity Act. This is our bread and butter, right? Bringing risk-free yield in a safe stablecoin in the most important hubs in on chain in in curve

pay keeper pools AMMs in Ave lending and important places. And also, the other good thing about it is it's activity-based rewards, right? And so, one thing is that you can also just give these rewards away in loaded in cards like Frax USDs on EtherFi, right? These EtherFi cards that are really really hot. And so, for example, you can have a system where you load a bunch of, you know, genius compliant stablecoin and we calculate a proprietary, you know, like algorithm based on like the swipe last time of swipes or like activity. And then also some integer of like obviously how much you you have in in like credit or or debit

on on the card, which is another way to say the the balance and and like the time factor of it. And what's interesting by this is is is actually if you pay out in in cash, the essentially the accumulated yield, it's not a taxable event, right? And so, like the IRS has already said stuff like cash back rewards, right? Like people don't put their cash back rebates from their cards in their IRS, you know, annual tax returns, right? Because I the IRS has said these are these are cash rebates. They're not income. They're not actually new income.

And so, in a funny way, smart good DeFi integrated, you know, neo bank integrated teams can actually turn this activity based requirement. I would have been better if it wasn't a requirement, if we could have just done it optionally, obviously, right? But but this activity based requirement into a new product where you get essentially risk-free yield that's tax-free and and not actually like a a dividend of sorts. And and the the Etherfi cards you guys are working on, that's an example of how you could structure this so that it is legally compliant and also beneficial to the end customer. Exactly. It's actually already out. If you have an Etherfi card, you know, the Etherfi guys are amazing. They already integrate for actual USD spend the risk-free rate distributed

daily based on activity, holdings, an entire kind of proprietary algorithm. And so you can go and try it, exactly. And and it's and it's tax-free. Very cool. Yeah. If you're American, I don't know. Different places, different tax. Yeah. Um I I I'm curious, you know, you mentioned the Genius Act that was essentially perfect. Why do you think the banks let it slide through so unwillingly? Like why were they not paying attention? No, no, no, they they they were paying attention. As someone that that was wasn't DC and stuff, they they were definitely paying attention, but they were really caught off guard with how fast everything happened with like the November election and then like everyone being pro-crypto super duper duper fast and then

this getting out the door even faster than other people thought and and like Senator Lummis and Senator Hagerty, the two authors of the bill being so so great and and such great allies of of the crypto industry. And so, you know, I they did try for sure. I I can I can assure you that, but now they, you know, they they wanted push the It's it's politics, right? They want to push the envelope here and I I always said it always just is about what layer the yield will get distributed. Once the Genius Act passed, the cat is out of the bag. Stable coins that that are that are genius compatible, compliant, these these safe stable coins, they exist.

They're going to be used in in really big places. Um you know, we have announcements coming. Everyone is is doing something really big with institutional and and large companies basically every every week or two. And so, it's just a matter of how. How is it? What layer is the yield going to be allowed to be distributed and who benefits the most um from who knows how to distribute it the best in those layers. Is it is it clunky? Is it smooth? Is it you know, the this team knows the best about it, stuff like that. Yeah. Uh Sim, I only have one more thing on the uh genius act, clarity act, all this legislation going through DC, which is that you know, I I think you you're of the position here that the clarity act we should just push it through. Uh the

yield compromise is something that we can't compromise and you know, the DeFi protocols at large stand to benefit from clarity going through because we can strategically, you know, curate these products in such a way that uh everyone ends up winning in the industry. You know, the the I guess the counterpoint here is that we have guidance from the SEC and the CFTC now that effectively puts classifications and market structure around the industry, digital securities, digital commodities, you know, some more classifications there as well as stablecoins as a carve-out. Uh Paul Atkins, Mike Selig are also talking about this innovation exemption. That sounds really exciting. I'm really curious to see what comes out of that.

The main thing and and uh reason, I guess, that we need clarity is just to instantiate that into law in case there's a new SEC chair, new CFTC chair that, you know, just issues different guidance. But if we can just issue amendments like we we're doing to the genius act, if we can just do, you know, issue amendments to new laws, and and it's just that easy to switch guidance and amendments like that, is it really like how how crucial is it that we get clarity act versus you know how far along the line do does the recent SEC CFTC guidance get get us? Yeah, I mean well that's why we have politics and and administrations coming in and out of the out of the the US every four to eight

years, right? So it's like the the guidance from Chair Atkins is is fantastic, it's great. The reason by the way that the prior chair who shall not be named if did not ever give any guidance is he was smart, he understood how how politics works, right? He knew if if you said ICOs are securities offerings, everyone would say, "Oh, this we're not doing an ICO, we're doing a points program, totally different." And then if if he said, "Well, actually points programs are you know, they're they're securities offerings too because of expectation, economic reality, yada yada yada." Then someone would say, "Oh, well, we're not actually doing points program, we're

doing an mystery airdrop rewards system of blah blah blah." And then if you said blah you you guys you guys get the the politics of it. And it's it's really just how easy it is to change. Obviously legislation and amendments are the hardest, which is why you know, this is really hard for the banks to to get through. And I think to to be fair, there's a lot of stuff in clarity that could be better again, right? But like especially some clauses with with DeFi and things like that, but it is clearly a pro crypto bill all things considered, right? And and we have probably a little bit of time to continue to adjust some some wording on yield and maybe a little bit of other stuff, but it's a pro crypto bill. It's a pro crypto bill. It makes it makes it

harder for people that politically don't agree with cryptos use cases and ethos to just issue different guidance or remove guidance or things like that. So we should definitely pass it for sure and it won't be the final thing. And I'm not saying there will be like a different crypto act, that's not at all what I'm saying. What I'm saying is there will be slightly different things that, you know, going back to what when I first came on, someone other people will have to get the baton passed to them in 2027. This is not like a a single thing.

It's not It's a big milestone, obviously, like genius and and things like that, but in 2027 there will be like, you know, other amendments proposed than like the spending bill and you know, God knows how much the spending bill will be with these these wars and and conflicts and and stuff like that. There has to be a lot of, you know, eyes on us still on the prize and and make sure that none of this stuff changes, but the the Clarity Act should hopefully get passed. I I'm very pro passing it. Would you say that the Clarity Act passing, as you say, earlier, you know, with Tether and and Paolo, what he's doing is a big benefit share here.

They also made an announcement that they're hiring a big a big four auditing company to audit the reserves and their backing and all of that. Would you say that that Circle's kind of regulatory arbitrage or their edge will be eroded away as regulatory clarity becomes clear or like what should we actually look for in this bill getting through Tether's audit to like understand how the dynamics between Tether and Circle will change? I think Tether's a big winner along with like Frax and the DeFi thing. Tether for different reasons, but but like Tether because they never pay yield, which is their benefit, their their strength, and

it's very hard for their primary competitor now to pay yield in the way that they're good at, like like off-chain distributor agreements and stuff, at least in this wording. Tether's doing great, obviously, right? Like no one needs to say it, but one of the things that I think is really interesting is and we're seeing this a lot. Like, we're talking to a lot of banks, a lot of new banks like Arab or everyone's, you know, heard of Palmers bank and and those guys. And what I I think is going to happen is we're going to open our eyes kind of in 6 to 12 months from now and there's going to be a lot of banks, a lot of huge companies and Visa and all of these

things that are going to natively accept a short list of, you know, genius compliant or just like, you know, stable coins that that are safe and and stuff or known like USDT and stuff, but a short list of them as actual deposits and and cash equivalents. Like, we're going to wake up in like, you know, 2027, you know, June or whatever and it's going to be like, oh holy crap, I can I can just send Frax USD or USDT or USDC or something to Wells Fargo my Wells Fargo account. And and I I can say this from from the conversations that that we're having without naming names and stuff, but this is it's this is going to happen quickly.

And then when that happens, I think that's when you have this step function of the stable coin market cap going from like, you know, what is it right now? 190 or 200 billion or something to like 500 billion in like a matter of like 3 to 6 months. These things are always like that, right? They're they're like this, they're like this, they're like this and then they're like up and then and then like a step function. And so, I think these are the things that are silently happening that they don't immediately have a feedback loop, but when you open your eyes and you can like buy real estate just literally by sending it to like the real estate escrow company and then they send it to your bank. Or like you can buy like things just by literally sending it to the banking or the card

layer rather than download this like spendable card and then it's super cool and then like but the but the merchant doesn't do the point of sale thing with wallet connect, and you know, it's not compatible yet. For- forget those. Like those things will all slowly mature, but then there'll be an inflection point where just a short list of stable coins will be real money. Those will grow, at least that's how I'm thinking about. Those will grow like, you know, 15x in in like overnight by like in in like 3 to 4 months period once those conditions are ready. That's how I think things will go. It won't be super fast right now. It won't be like, you know, super quickly on on this stuff until those conditions are met essentially.

And And Sam, you've talked about the DeFi layer on top of the stablecoin layer and how, you know, Frax is positioned for that. As you're thinking through banks and the the typical banking and payment layer starting to accept more stablecoins, especially these genius compatible stablecoins, do they hold those on their balance sheet? How do they deploy those? What does the banking and the regulated DeFi landscape on top of stablecoins look like? Yeah, that that's a great question cuz I everyone's trying to figure that out right now. I can say without kind of naming too many names and stuff is some some banks are exploring literally accepting things like Frax USD specifically, and then not redeeming it

for cash, and then depositing, right? Cuz that's different. That's different if you just take the stablecoin on the software layer, redeem it for cash, and then put it on the bank's balance sheet, but I mean literally holding the FRX USD, and then showing to the customer you have like $1,000 if you have a 1,000 of those, right? And so, those are happen those explorations are happening. Um again, I think it'll be in 2027 when it'll roll out to a bunch of places where uh there will be a short list of stablecoins like that. I also think that the what those short list of stablecoins will be will be determined by how much on-chain penetration they will have because at the end of the day, if you

just launch a stable coin and there's zero holders of it, right? Like like let's say a new stable coin by, you know, Citibank or something like that. But no one holds it. No one uses it on chain. No one does anything. You could say, "Hey, any city account, you could just deposit this." But no one has it anyway, right? And so the the short-list of stable coins will be the ones that are used in the most important places on chain, are held and spent on the most important neo banks and crypto products, have centralized exchange like listing so people can come in and out cuz those are the ones that'll be in demand. And so that's why we have such a huge DeFi footprint and and continue to grow it because you can't just say, "Hey,

we're one of the few stable coins that are pure money." Right? And and just like say it and and make it happen. It has to actually be used by a large number of people. Yeah. Yeah, I mean, I think that there's a there's a big fight right now to get stable coins into the hands of as many people as possible. We're We're here at DAS and it's it's everywhere. I mean, it is like we're going to get stable coins into brokerages. We're going to tokenize equities. They're They're going to be on chain with stable coins. There's like there's just There's just this massive institutional push right now that I think is going to accelerate what you're talking about. So we kind of have like these two things happening at once, right? Where it's

like, "Yes, we're going to get this through. There's going to be some trade-offs, some kind of accepting of of of a situation that maybe like on the crypto side we didn't fully want, but at least we're getting this through." And then we have this like just institutional FOMO happening at the same time. I think we need to reset our priors a bit on what the expected growth is going to be for stable coins in in of total supply over the coming year to two. I know we had I think it was Scott Bessent say 3 trillion by 2028. Like it looks like that's a far, you know, kind of road.

Like we're only at a I think a couple hundred billion, 320 or something, 310. We're kind of breaking out to new highs again as the last couple weeks. But I think that it'll be kind of slow, so slow. And I think next year will be the year where we really see that acceleration because this I mean this this this is happening from both sides right now and it's just it's just undeniable. And I think something that people are like interested in Sam is like how do I invest into this? Right? Like how do I how do I get in front of this? I know this is going to happen. There's a bit of like a sense of a gap happening where people are like confused how to invest in this. Obviously, you're you're the founder of Frax, there's public equities, there's kind of other crypto

tokens. But I'm curious like what you think the general like investment landscape is going to evolve into. So, you know, we have a institutional track, we have this clarity track happening. How do we, you know, get in front of this? How do we invest into this? What are some of the second and third order effects that are going to happen that'll, you know, maybe change a dynamic in the market, present good opportunities? Yeah, I mean I think that the main stablecoin like assets that are investable, obviously not financial advice, but like Circle stock, Frax tokens, clearly there's there's there's Sky, which is a little bit different cuz their main product is yield bearing.

Like DeFi stablecoin. But we saw Circle went down by 20% because the market actually can properly price in the fact that, you know, their way of actually distributing USDC got hit the hardest, right? In in this current wording, which is again not final. But I'd like to see people and investors and stuff as they get more and more sophisticated. For example, this wording obviously is very good for DFI native distribution genius combined stable coins which FRAX, right?

And there there might be a few more, right? But I think the market is getting better and better at being more precise about the different flavors of stable coin investment like Sky great yield bearing stable coin you know protocol different thesis Athena obviously, but for when it comes to genius like money payment type stable coins that have like the you know hundreds of billions and and and trillions of TAM. I think there'll be a few flavors, right? There'll be Circle stock, there'll be FRAX tokens, there's probably like I don't know other maybe there's there's like Paxos stock in the private markets, but they all will have their different you know value propositions so to speak and I think the market's getting better

and better at pricing them. Obviously, Tether seems like that you know, they're coming out more and more these days. Yeah. So just couple last things. Uh So the market is right or wrong about Circle stock over the last couple of days? Uh say say that again. You think so so it sounds like you know the the Circle way of distributing USDC got hit the hardest. It it got hit really hard. Do you think the market is right or wrong about the Circle stock over the last couple of days?

I think it's right that it hurt Circle the most, but I don't know if 20% wipeout is is like maybe it's partly due to the the war in Iran or or whatever, but like in in macro, but but like I think it's good that people are specifically investors are specifically able to make these kind of changes. It's like oh this hurt Circle the most and not you know like like FRAX the token didn't go down 20% at during that, right? But like the point is like they know how to value these things more and more. I don't know if the absolute amount was the right amount. But yeah.

Yeah. Okay. The other one was just kind of based on on the the stat that Annie brought up. You know, Scott Bessent set the line at $3 trillion by 2028. You taking the the over the under? Um well, I don't know if Secretary Bessent expected what is a hundred dollar crude or like a giant war on the weekend that it was not a 48-hour like excursion, whatever President Trump calls it. But I would still take the the estimate as real, but I would take it as a step function. I don't think if if people thought, oh, it's going to slowly and evenly like get there,

why aren't we like hitting the dot plot, you know, on like a linear graph. I don't think it's going to be like that. I don't think it's going to be like that for H2 of this year either. But I do think the estimate is fairly accurate, you know, assuming literally World War III doesn't doesn't start, which seems like it's more likely these days. But I think it's I think I'd put it still there by by 2030. Got it. Yeah. Sam? Yeah. Yeah. Thank you so much for coming on, man. Always a pleasure. >> We appreciate your words. >> I think you you might be the lone wolf when it comes to this Clarity Act as as a success for the crypto industry, but I have a feeling more and more people will start to come around to that realization. And and I hope we get it.

Polymarket has a 61% chance Clarity Act signed into law 2026. Yeah, next time I'm back, hopefully it's either there or or almost. Thanks for having me, guys. Yeah, cheers, Sam. See you next time. Thanks Sam.