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Ryan Knudsen (3:25)

The tension between banks and crypto comes down to regulation, specifically regulation about a reward that crypto companies like to offer their customers. A reward that to banks looks a lot like paying interest on savings accounts. For banks, paying interest is a core part of their business model. You give a bank your savings, it pays you a little interest, and then the bank loans your money out to other people at a higher interest rate. Everybody wins, you earn some cash, the bank makes some money and someone gets a loan. In the past decade, crypto companies have started doing something similar with stablecoins, which are pegged to real world currencies like US Dollars. Companies that offered stablecoins started paying interest like rewards, to people who bought them. And in 2018, Coinbase, the largest US based crypto company, started doing that too.

Unnamed Crypto/Finance Analyst (4:18)

So Coinbase has a partnership with the stablecoin issuers Circle, where Coinbase shares a

Amrith Ramkumar (4:25)

lot of the revenue with Circle and gets to offer circ stablecoin on the Coinbase platform. And as part of that, Coinbase offers holders essential yields, annual payments, steady rewards payments that translate to about 3 to 4% a year.

Ryan Knudsen (4:44)

Coinbase CEO Brian Armstrong has made no secret that he wants to give banks a run for their money.

Unnamed Crypto/Finance Analyst (4:49)

Armstrong's open about this and has talked about it in interviews.

Amrith Ramkumar (4:52)

He has said, we want to compete with the banks and we want to eventually replace them essentially.

Unnamed Crypto/Finance Analyst (4:56)

So it's sort of their stated mission.

Ryan Knudsen (4:58)

And here he is on Fox Business last year.

Brian Armstrong (5:02)

Ultimately, we want to be a bank replacement for people. We want to be their primary financial account and we can offer better financial service products across the board, not just

Ryan Knudsen (5:10)

on trading to compete with banks. Coinbase has been adding more and more services over the years.

Amrith Ramkumar (5:15)

They began offering trading in other types of cryptocurrencies. They've begun offering payments.

Unnamed Crypto/Finance Analyst (5:20)

They've also started letting people trade stocks. So their idea is really to become

Amrith Ramkumar (5:25)

this super app that you can do any type of financial transaction, essentially. And that is a way they've said they want to rival them in a lot of these businesses.

Ryan Knudsen (5:34)

One way to compete with banks is by offering higher returns on people's cash. A lot of banks pay almost no interest on standard checking and savings accounts. It's often only around a tenth of a percent. But with these stablecoin accounts, crypto companies can offer a lot more, even without lending money out the way banks do.

Amrith Ramkumar (5:53)

Coinbase and crypto exchanges are saying, we want to be offering 3 to 4%, so more people use them and they want the banks to have to compete

Ryan Knudsen (6:01)

with that I understand the business model for banks, that they pay you a little interest to keep your savings, and then they lend that money out at a higher rate and they profit the difference. But if Coinbase doesn't do that, if they aren't lending money out to people, then why do they offer such high reward payments of 3 or 4%?

Unnamed Crypto/Finance Analyst (6:20)

Coinbase is trying to keep as many

Amrith Ramkumar (6:22)

people on its platform and using its products as possible.

Unnamed Crypto/Finance Analyst (6:26)

So the stablecoin market is pretty competitive. So everyone is sort of competing to

Amrith Ramkumar (6:32)

keep consumers on their platform and trading their stablecoins. And so payment like Yield payments of 3 to 4% are seen as a good way to do that and a good way to incentivize consumers again to stay. So that's the biggest thing for them. And it's hard to overstate how important this partnership with Circle is to their overall business. It's extremely profitable in a way that a lot of other crypto currency products are not, because of how volatile they are. And if this partnership were to go away, and these rewards were to go away, we're told it could be worth billions of dollars to Coinbase's bottom line over many years.

Ryan Knudsen (7:08)

Rather than making money by lending out deposits like banks do, Coinbase makes money through the rewards program with Circle by investing the US Dollars that underpin the stablecoin into short term US treasury bonds. Banks aren't happy about this.

Amrith Ramkumar (7:25)

The banks see Armstrong and crypto as encroaching on their home turf, essentially, and trying to pay consumers rewards. So banks see that as a threat to their checking accounts, which offer pretty paltry returns, about 0.1% on average. And they say that if Coinbase wins this fight, there could be a threat to their deposit business.

Unnamed Crypto/Finance Analyst (7:47)

Coinbase and others don't have to follow

Amrith Ramkumar (7:49)

the same regulations they do. And those regulations are why the checking account yields are what they are. And they also do a lot of lending with that money. And it sort of underpins their whole business.

Ryan Knudsen (8:00)

Banks are subject to tons of regulations that are designed to keep the financial industry safe, regulations that, at least right now, crypto companies aren't subject to. And banks worry that trillions of dollars of bank deposits could shift to crypto if stablecoins can make payouts to consumers like this. And if banks don't have deposits, they can't lend money, which can impact the economy.

Unnamed Crypto/Finance Analyst (8:23)

Coinbase and others argue that's basically providing

Amrith Ramkumar (8:26)

different services to consumers on its platform. And as part of that, it should be able to give them a little sweetener, a little incentive. And if banks and others don't like that they should do the same thing or try to compete more.

Ryan Knudsen (8:39)

This tension between banks and crypto has been building for a while without a clear resolution in sight. But during the last election in 2024, how to regulate crypto became a major campaign issue, especially for President Trump, who became very public in his support for the crypto industry.

Donald Trump (8:56)

The United States will be the crypto capital of the planet and the bitcoin superpower of the world. And we'll get it done.

Ryan Knudsen (9:05)

The Trump family even launched World Liberty Financial, a cryptocurrency company that offers its own stablecoin. And with a crypto friendly president in office, the crypto industry started pushing for regulations that it hoped would help solidify and expand crypto's foothold in the financial industry.

Amrith Ramkumar (9:20)

The first six to eight months of last year, just really exciting for a lot of crypto executives and a bit worrisome for bankers and others who are watching this and wondering where it would all lead.

Ryan Knudsen (9:31)

And the first bill that got passed was called the Genius Act. It helped set standards for stablecoins that the industry had been desperate for.

Amrith Ramkumar (9:41)

It was the nation's first block codifying standards for crypto.

Unnamed Crypto/Finance Analyst (9:45)

So it was sort of a watershed

Ryan Knudsen (9:46)

moment for the sector and for banks. The bill also provided what seemingly looked like a win. It said firms that issued stablecoins couldn't pay interest.

Amrith Ramkumar (9:56)

There was basically language in there saying that stablecoin issuers. So that would be like circle, the companies actually issuing the tokens, they could not pay interest essentially, to holders of those tokens. And the banks essentially said, okay, that's good, they can't pay interest. We're essentially on a level playing field. In a lot of ways, we can live with that.

Ryan Knudsen (10:20)

But the Genius act had a bit of a loophole. While it said stablecoin issuers couldn't pay rewards that looked like interest payments, it didn't say anything about exchanges like Coinbase.

Unnamed Crypto/Finance Analyst (10:32)

And so people argued that under that law, exchanges could pay rewards.

Amrith Ramkumar (10:38)

And so Coinbase and others were very happy with that.

Ryan Knudsen (10:43)

You know who wasn't so happy? The banks. That's next.

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Ryan Knudsen (12:30)

After the Genius act was signed into law, Congress started talking about passing another bill, a more comprehensive one, that would establish a framework for how the whole crypto industry would be regulated. And that would settle the debate once and for all about which agency, the securities and Exchange Commission or the Commodities Futures Trading Commission, gets to regulate it. The bill is called the Clarity Act. It's also known as the Market Structure Bill.

Amrith Ramkumar (12:55)

Market structure is sort of this holy grail because it's again, it's in law what how to regulate the space. This is xyz, what we have to do as a crypto firm. And this is what the regulators oversee. And this is how the process works.

Ryan Knudsen (13:09)

The bill is hundreds of pages long.

Amrith Ramkumar (13:12)

It's really wonky regulations outlining how every type of cryptocurrency will be regulated.

Unnamed Crypto/Finance Analyst (13:18)

And so things were going along and

Amrith Ramkumar (13:21)

going along, and then all of a sudden, basically toward the end of last year and the start of this year, we started hearing rumblings that this fight over rewards was becoming a really big sticking point.

Ryan Knudsen (13:34)

The banks started making an issue of this loophole that allowed Coinbase to continue offering those interest like rewards payments, even though the Genius act banned stablecoin issuers from doing so.

Unnamed Crypto/Finance Analyst (13:44)

And so as these discussions start, it becomes clear to the banks that they

Amrith Ramkumar (13:50)

have a bit of A problem in

Unnamed Crypto/Finance Analyst (13:52)

that crypto exchanges like Coinbase are allowed

Amrith Ramkumar (13:55)

to pay these rewards and yield.

Unnamed Crypto/Finance Analyst (13:57)

So banks sort of realized that they

Amrith Ramkumar (13:59)

need to essentially start a big fight over it.

Ryan Knudsen (14:03)

Why are banks upset about this? I mean, so what, there's a new competitor that's offering higher interest. Like, what's the big deal? Why do banks think this is so unfair?

Unnamed Crypto/Finance Analyst (14:12)

Banks just face really tight capital requirements,

Amrith Ramkumar (14:14)

so they have to be very careful with how much they lend and who they lend to. And they have to do a lot of checks and comply with a lot of rules in all of those activities.

Unnamed Crypto/Finance Analyst (14:23)

And so banks say, coinbase, if you

Amrith Ramkumar (14:26)

want to be a bank, be a bank. If you want to be a money market fund, be a money market fund. But essentially that you can't do both. And so basically they're saying they don't have to follow the analogous rules that banks or other investment firms do when they offer those products.

Ryan Knudsen (14:43)

One of the things banks started doing was lobbying lawmakers directly and warning that local banks in particular might get hurt if Coinbase is able to keep issuing interest like rewards.

Unnamed Crypto/Finance Analyst (14:54)

So the banks have said, if you start chipping away at that with these

Amrith Ramkumar (14:56)

products, we might have serious problems.

Unnamed Crypto/Finance Analyst (14:59)

And it's important to note that it's

Amrith Ramkumar (15:01)

a lot of the community banks in states across the country that have raised issues with this, and that's why it's had such a big impact in the Senate. So you have senators like Thom Tillis, North Carolina, Mike Brown, South Dakota, Katie Britt, Alabama, and others like John Kennedy, Louisiana, where they have these relationships with community bankers going back a long time.

Unnamed Crypto/Finance Analyst (15:23)

And when you have bankers calling you

Amrith Ramkumar (15:25)

up saying, don't support this because this could threaten our business. And there's a government report that said there could even be, like, trillions of dollars in deposits at risk depending on how these cryptocurrencies and rewards are regulated, it's a pretty powerful force.

Ryan Knudsen (15:43)

Here's Democratic Representative Bill Foster discussing these concerns at a hearing in February.

Bill Foster (15:47)

They had a fear that interest bearing stablecoins would just drain the deposits from small community banks and take. Take away one of the only sources of capital that small communities have.

Ryan Knudsen (16:00)

The bill passed the House, but when it got to the Senate, it started running into problems.

Unnamed Crypto/Finance Analyst (16:05)

And so all of that was sort

Amrith Ramkumar (16:08)

of coming to a head when the Banking Committee scheduled a markup where the committee would vote on it last month.

Unnamed Crypto/Finance Analyst (16:15)

And there were discussions that there were

Amrith Ramkumar (16:18)

going to be a lot of amendments to the draft bill that would cover this rewards issue that could go many different ways. And Brian Armstrong was Walking around the

Unnamed Crypto/Finance Analyst (16:29)

Capitol, meeting with senators that day.

Ryan Knudsen (16:32)

And Armstrong also started going on TV and giving interviews.

Brian Armstrong (16:35)

Now the banks really are coming and trying to undermine the President's crypto agenda. I mean, these are the same banks that, you know, debanked his, him and his family, right. And they want to come in and say that Americans should not be able to actually earn more money on their money. They're trying to protect their own profit margins.

Unnamed Crypto/Finance Analyst (16:50)

And he basically became convinced there was

Amrith Ramkumar (16:52)

no path that would be workable to keep rewards in the markup. And he was very worried that if it cleared the markup with a bad solution in their eyes that wasn't favorable to them, that they wouldn't have time to get it back, basically, that it would go forward to the full Senate and there would be so much momentum to get it done, and that he was worried it would become a runaway train and he wanted to sort of stop that in its tracks. So Armstrong fired off a post on X saying, we can't support this bill. There are too many problems with it. The rewards aspect is one aspect.

Unnamed Crypto/Finance Analyst (17:30)

There are other aspects that crypto executives

Amrith Ramkumar (17:32)

have issues with that were essentially concessions given to Democrats to sort of tighten the rules in some places. But the rewards piece was a big piece of it. And I mean, that ex post essentially went off like a bomb essentially in the sector. I mean, it had all sorts of ripple effects. And it was the week before Davos.

Ryan Knudsen (17:51)

This is what had gotten the attention of Jamie Dimon, the CEO of JPMorgan Chase, and led to that confrontation with Armstrong in Davos. After Armstrong's post, the Senate Banking Committee postponed the markup and the vote and

Amrith Ramkumar (18:06)

it threw the whole future of the bill in jeopardy. So then he went to Davos essentially to smooth things over with the banks and try to do some damage control after he had alienated them and a lot of people in Washington.

Ryan Knudsen (18:20)

Why is the rewards issue so important for Armstrong?

Unnamed Crypto/Finance Analyst (18:24)

Armstrong is essentially weighing the long term

Amrith Ramkumar (18:26)

benefits of clarity to the crypto ecosystems, to Coinbase.

Unnamed Crypto/Finance Analyst (18:30)

And there are a lot, you would

Amrith Ramkumar (18:31)

have presumably more trading in these assets, more investor confidence, and all of that would flow through to the bottom line versus the short term importance of stablecoins and the profits from rewards to Coinbase's business in the next, let's call it to four years, which matter a lot to investors. And again, we're talking about billions of dollars over several years that these rewards are worth.

Unnamed Crypto/Finance Analyst (18:56)

So losing those in the short term

Amrith Ramkumar (18:58)

is a very big hit. And it's also a symbolic one because that again, would show that maybe Coinbase isn't as powerful in Washington as they think they are or that others have said they are. If they are to take on this fight with banks and then lose and lose these rewards.

Ryan Knudsen (19:16)

It's incredible that Brian Armstrong, this one man's opinion, had such a big impact on this piece of legislation.

Unnamed Crypto/Finance Analyst (19:21)

It speaks volumes about Armstrong's influence and

Amrith Ramkumar (19:24)

just the elephant in the room that

Unnamed Crypto/Finance Analyst (19:26)

Coinbase is with a lot of this. Coinbase is by far the biggest crypto

Amrith Ramkumar (19:30)

lobbying presence in Washington.

Unnamed Crypto/Finance Analyst (19:32)

They've just invested so much more than

Amrith Ramkumar (19:34)

other companies in lobbying.

Unnamed Crypto/Finance Analyst (19:36)

They're seen as sort of the make

Amrith Ramkumar (19:37)

or break player and there are other

Unnamed Crypto/Finance Analyst (19:39)

companies and there are trade associations.

Amrith Ramkumar (19:42)

But Coinbase started or donates the most to to fund a lot of the trade associations.

Unnamed Crypto/Finance Analyst (19:48)

So they are seen as sort of

Amrith Ramkumar (19:50)

the stamp of approval, Armstrong pushing the button and being the one to get out in front of it. It does speak volumes.

Ryan Knudsen (20:00)

What do you think it'll mean for the crypto industry if this act is not able to be passed in the foreseeable future?

Amrith Ramkumar (20:07)

If this doesn't pass, it's a huge blow to the crypto industry as a whole. If you lose that and that gets taken off the table, I mean, that has a huge impact, I think, on

Unnamed Crypto/Finance Analyst (20:16)

how investors and others view the sector

Amrith Ramkumar (20:19)

from a big picture perspective moving forward. A lot of the excitement last year was predicated on the idea that this bill would pass. So if it doesn't, it could again raise questions about how legitimate crypto is and its sort of long term staying power.

Ryan Knudsen (20:50)

That's all for today, Tuesday, March 17. The Journal is a co production of Spotify in the Wall Street Journal. Additional reporting in this episode by Dylan Tokar and Gina He. If you like the show and want to connect with us behind the scenes, follow me on Instagram. Ryan Knudsen, Thanks for listening. See you tomorrow.

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