Why Crypto Is About to Get a Big Leg Up on Banks: DEX in the City

Transcript

There's a lot of really substantive developments that happen could that could have long-term impact. So the first one is yet another action that really has the capacity to change what it means to be a bank. Uh so V tell us more about this executive order that we heard. Yeah. So, the White House just issued a new executive order on fintech um access to federal the Federal Reserve payment accounts. And so, first of all, for those of you guys who don't know what an executive order is, it's basically something the White House the executive branch issues to like agencies directing directing them to do

something. So it could be like to to consider like a new regulation or to do a study on something. So in this case um they're telling the Fed to consider giving FinTech and you know potentially like crypto companies uh to consider giving them access to a Fed master account. And a Fed master account like the best way to think about it is it gives you access to basically the core plumbing of the US dollar system. It lets qualifying institutions settle directly in central bank money, so US dollars, instead of relying on intermediary banks, right? So, um, as many of us in crypto know, if you're a crypto company or a crypto some crypto banks or a stablecoin issuer or a

tokenized securities platform or a digital asset custodian, you've always had to use a separate correspondent bank for all of your fee fiat and payment needs. Um so with a Fed master account what that could mean is first of all less risk of debanking right which is a huge issue like for for many years. Um and you have a more credible and direct and efficient bridge between what you do in the onchain world and the traditional like financial world. So, I've talked about this before, but um allowing and enabling like more seamless connectivity between the traditional fiat system and traditional payment systems um and

crypto is really the only way that crypto and DeFi can scale. So, this is I think a really important move by the White House. And we talked about this on a previous episode in February, but the context here is really important too, right? So, if you guys recall earlier this year, Kraken got what people have described as a kind of master account light. It's a limited purpose Fed account. So, it's not full access to like every Fed service, which is what the EEO is asking the Fed to consider here. But, it was at the time, I think, a major signal that a digital asset bank or even just a digital asset company could get direct access to the the uh Fed master payment system like within

defined guard rails. So, this EO just pushes that even further and I think it's really good progress. So, it'll be interesting. It'll be interesting to see what the Fed Fed ends up doing. And I think it'll I think what we can expect, of course, is for the traditional banks to push back and warn about like the various reasons why this could be dangerous, right? like you're giving these companies access to the Fed system without having to comply with all of the requirements that traditional banks have to comply with under the different uh banking regulations. Um, but I, you know, my my take on all of this is it's really about kind of unbundling banking from the rest of the financial system,

right? Like historically if you wanted access to Fed rails you had to to fit into the traditional bank box. But what we've seen I think fintech do for many years and now more so uh even more so what we've seen crypto try to do is really collapse the traditional categories between banking and other kinds of financial services. Right? So, I think this is sort of going to be the trend for the next few years is companies and platforms just trying to and wanting to be able to offer more and more financial services out of like the same platform and I think you're sort of seeing that across the board in crypto.

>> I think that's such a good overview and really thoughtful and in my mind access is great and thoughtful access is great. You know, as someone who has worked also in fintech for a long time and deals a lot of fintech companies, like this has been something that they have been fighting for for a while and the skinny master account has been a potential success. My question associated with the EO is it's all about access and opening doors, but there's pretty much nothing in there about sort of protecting once access is there and ensuring that the right sort of guard rails are in place, which there are some written in, but those are written in for banks. They don't work in the same way when it comes

to fintex or crypto entities or like state chartered entities, although some cha states have really really strong oversight committees. So like as you were saying, Fed master account is the plumbing for the whole US financial system. It's like something you don't understand until you have to understand it because you work in the space. So when we give fintech or crypto firms direct access to this plumbing and this infrastructure, we're plugging them into critical infrastructure. And so you need to be mature and responsible enough to take that on and take that responsibility on. And it's unclear from the EO about whether they've really thought through how they're going to keep it safe. There's no real mention of it. They're accelerating the front end,

but it's unclear if the back end is fully built out. You know, the framework of all that with Worsh just coming in now as well is a fascinating one because he's sort of walking into the building at the Fed even though the Fed is technically independent with this concept of like what might be the first thing that he jumps into like day one. >> Yeah. >> Yeah. I mean, you know, I was I was the GC of a cryp a federally regulated crypto bank for a while, right? And and you're absolutely right. There are real concerns that are unique to this asset class and the rails on which these kinds of assets move, right? Like unique to blockchain around AML and cyber and

liquidity and operational risk, right? And I think all of that does need to be considered because it really does differ from, you know, the kinds of risks that traditional fiat rails and traditional assets pose. So, I do expect that we'll get a lot of comments um from both sides, both Trady and and crypto. And I I do, you know, expect and and hope that the Fed takes all of that really seriously. >> I I would be very upset as of late if I were a TR bank because it's really interesting. I looked at these developments and combined with genius with the genius act banks are really set to lose two of their fundamental advantages and differentiators from

non-bank competitors and that's you know custody of customer funds and facilitating payments. So we're now in a situation where you have this class of fintaxs that are growing rapidly and they're really set to perform functions that are really identical from the retail customer perspective. So this is this is a real threat to some of the banks bottom line. And you have to ask we we saw a lot of movement on genius.

We we've all we're all familiar with kind of a debate tied to the Clarity Act, the crypto market structure bill as to kind of the yield provisions that you know banks are upset about these of these stable coins. But we're getting to the point where you have to ask yourself like what is going to different differentiate a traditions from a non-bank permitted payment stable coin issuer which is you know the term of art under the Genius Act. I would look at that and say there's a few things. I mean, one is FDIC insurance.

There's definitely going to be a sector of people that are going to continue to engage with trad that that peace of mind. And then also, you know, the banks still have the ability to borrow customer funds for their kind of own use. There's a lot more flexibility that they have in doing that. Whereas, you know, PPSIS, you know, the non-bank permitted payment mint stable coin issuers, um, you know, they can really only custody stable coins. They can't borrow them. They have limitations on that yield. But that being said, this is a continued expansion of fintech powers.

And with the expansion of powers is an expansion of revenue generation that was the exclusive kind of power of banks. So, I I'm really interested to see how they're going to come out swinging on the policy front because if I were in the trad shoes, I would continue to be furious about these developments, frankly. >> Yeah. >> It's really interesting because fintech has been fighting for something like this for so long. Like the whole point of FinTech was really to disrupt banks and they found this angle that worked really, really well for them. largely working with smaller banks like not the big names that we know of where they were able to stamp FDIC insured but it was really just like banking as a service wrapped but the problem with

that was that there was no really good record and that's what led to Synapse that's what led to a bunch of other like these fintech banking as a service collapses where we thought maybe that sector was dead really but perhaps this is another way in that could be more structured and regulated because a lot of these fintech banking as a service were regulated at the state level more or not really at all because they weren't taking custody and they were just more like the interaction with the customer. So there's something to learn here from how FinTech got customers on board. But there's also something to learn with perhaps they did so too quickly without the proper structure in

place. >> Yeah. And look, there is a very long history of new technology like being suffocated by legacy participants who don't want the new technology because it impedes their revenue and sorry I shouldn't say suffocated an attempt to suffocate or mitigate the growth of these new technology options I mean we've seen it with energy we've seen it with transportation like EV versus auto I mean we could go into that at length communications healthcare it there in every area there's always the legacy participants that are like, "Get off my lawn. We don't want these upstarts, this this kind of new emerging technology to

threaten our core business." So, this is going to happen inevitably. We're going to see the policy fight. I I firmly believe that the FinTechs are ultimately going to win because a lot of what they're doing is better ultimately for the underlying customer. I hope that fight is accompanied by exactly what Jesse you flagged in that there's the accompanying rails that protect those individual retail consumers that are looking for, you know, better, more efficient process of of banking and yield and all of the good stuff. Um, you know, rest in peace, checkbooks, right?

Like, does anyone here know how to balance a checkbook? It's not something I'm teaching my kids. Like, you know, what is that about? Uh but it'll be really interesting to see how this administration and the next administration kind of welcomes these disruptors to the show. Like that's one question I wanted to ask you V. Like do you think this kind of embrace in the banking sphere which is less of a specific crypto issue will continue with a Democratic administration?

>> Yeah. I I just I really feel like you can't put the genie back in the bottle. Right. For me, this is just like it's just another example of crypto integrating more and more into the core financial system and collapsing all of these boundaries. And I just that's the direction of travel and I don't think a change in administration. They can try to roll some of that back, but ultimately they're not going to stop the overall trend. >> Yeah. And on that front, like we've seen a lot of executive orders from President Trump. He's been extremely productive on EOS alone. A lot of those EO EOS have been challenged in court. Uh many many of them because of course there are limitations on presidential executive

orders. They're very powerful but they're subject to a number of really important constraints. >> Yeah. >> They cannot be a mechanism of creating new law through executive order alone. Like they have to be grounded in his powers. And the way that you check EO powers is through frankly the litigation process is the most effective one. So there's always the the chance that say for instance there's a Democratic president the first thing he or she does on day one is to roll back a multitude of executive orders. But I agree with you V. Like I don't think that they're I don't think this makes sense from a partisan perspective to say oh no banks like you know fintech bad banks good

because that's ridiculous. Like it makes no sense. Look, I think this actually is one circumstance where an EO is the right mechanism, right? I normally say that this feels like the kind of thing that should be an EO, right? But I think this whole narrative of like Dems hate innovation and they like banks. Actually, Dems have historically fought against banks. That's what's so interesting about this dynamic right now. >> That was a clip from Decks in the City where the wallets are cold and the takes are hot. And we've got a lot more in the full episode. links in the show notes.

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