D (5:01)

This year, or why Poly Market markets are just wrong and the probability.

B (5:05)

Or why they're wrong. I don't know what side you're betting on this market.

A (5:08)

I hadn't heard that it dropped down to 40. I might actually. Yeah, I might go place a bet if I could.

C (5:13)

It doesn't sound like good action.

B (5:15)

There you go. Okay, nice. By the time you hear this, Peter might be pushing the price up.

A (5:19)

No, no. Just never listen to me on any investment advice because. Just because I'm bad at it, not because that's a disclaimer. You know, I'm just bad. Sure, sure. I've been in crypto for, like, way too long to not be far wealthier than I am. Anyway, talk you through clarity. You know, it's funny. I've even had to sort of struggle to call it clarity again, because for a long time when we were working in the Senate, it was the R, the Responsible Innovation RIFA in Finance act, which goes all the way back to, like, Lummis from years ago. I'm bringing up this ephemera mostly because you mentioned that this started in the house as fit 21, then became clarity in the House, and then when it came to the Senate, to the extent it even came to the Senate, it got reworked because the Senate doesn't normally just take up something from the House. They like to have a crack at the base text before they're sort of anchored to anything. So it wasn't until recently that we were even calling it clarity in the Senate. We were calling it something else, but now we're all on board calling it clarity in the Senate. This is the most uninteresting ephemera on the background of a piece of legislation that your listeners will ever hear, and I have no idea why I let off with it. Moving on from that, what I would say is this. When we think about whether a new piece of legislation that touches many parts of crypto and crypto regulation is good or bad, we have to put it in the context of where we are as far as existing law. Existing law in this country is broad and vague with respect to how crypto could be regulated either by the SEC or by treasury for anti money laundering purposes. And you don't have to take my word for it, although I've been saying this for 10 years. You just have to see what happened under the last administration when Chair Gensler, who is ostensibly from the left wing of the Democratic Party, sort of Elizabeth Warren acolyte, when he had power to interpret the securities laws the way that we saw them do rulemakings, the way that they saw them do enforcement actions, was incredibly aggressive, claiming large swaths of jurisdiction both over token issuance things like ICOs, which in some cases might be fair, but also over things like DEFI via the Exchange act rulemaking, which was this attempt under the last, the last chairmanship at the SEC to classify anyone who's making available communications protocol, including crypto communications protocol. So software publishers as people who are obligated to register under the Exchange act, people who are obligated to register as broker dealers. And so this takes all of our notions of its software. It's peer to peer transactions. Using that software you can be your own bank and puts it into. No, actually the people writing the software are going to be treated just like the New York Stock Exchange, just like the NASDAQ super aggressive regulation that basically forecloses this being a permissionless open innovation. And we saw similar things at the treasury with respect to rulemakings that would potentially classify more people in this space as bank Secrecy act obligated, which of course means they need to know their customers, collect information, do suspicious activity reporting and all that kind of thing. We also saw prosecutions of developers for failure to register as money transmitters. This is most evident in the case of the Tornado cash developer Roman Storm, but also the Samurai Wallet developers, a Bitcoin privacy wallet and several enforcement actions that never actually came to fruition against what I would consider more mainstream or sort of blue chip like developers in the, in the defi space, which have since sort of fallen by the wayside with maybe with the change administration, but could come back at any day because again, the laws on the books, the Bank Secrecy act, the securities act are very broad. So with that throat clearing, how do I judge this bill? I'm not going to look at this bill and think I need to get every word absolutely perfect so that it's Future proofed for 100 years. I'm looking at this bill saying does it meaningfully constrain executive power at treasury and the securities Exchange Commission such that a malicious chairman or a malicious Secretary of Treasury would have a harder time arguing that they already have the legislative authority to Go after say a software developer who's just building an L2 or something like that. And on that metric, on that sort of fundamental question, this bill has reached the point in Senate banking where I'm comfortable saying this is a, this is a significant curtailment of discretionary authority at the agencies vis a vis things like software development, things like running infrastructure. And that means that from Coin Center's perspective, like as long as this trajectory is maintained and there's some work around the edges that we believe the drafters are already focused on, that we would ultimately support the passage of this bill. So that's, that's where we are now.

B (10:16)

Okay, so Peter, let me, let me push back a little bit against the core of your argument. So there was a, there was a back and forth between you and Lola Elites, who I think is affiliated with the Rage, which is a privacy focused publication. And it seems like one of the core of the argument. And I'm not an expert on the bill, so please correct me wherever I'm wrong, but my understanding is that in the bill, a lot of the developer liability hinges on this idea of control. And control can come in a variety of forms. Now one of those forms of control is something like an admin key or the ability to modify the software in place. And for most real world systems, there's a few systems like let's say Uniswap or Wrapped Eth, that they're so simple, they're totally immutable. There's no admin, there's no way that developers can directly intercede. Almost everything else that would answer to the name of Defi. There is some kind of admin key which is mostly used for security, that if there's a hack, if there's a known vulnerability that's been disclosed, there's the ability to turn off the contracts, migrate the contracts, pause the contracts. And this would pretty easily be interpreted by a law like this as like that looks like control. And because you have control, therefore you have liability. Therefore basically, if you're Hayden, maybe you're good. If you're anybody else building in Defi. Okay, sorry, off to jail. You have liability. Is that a correct reading? And if not, why not?

A (11:41)

I have a couple of. The spiciest thing I have to say is this, that if you're in Defi, maybe you should be building like Hayden. Like, I don't know, like. And that's not, that's not my business. My business is the law and policy. But when I got started at coin center in 2014, it was bitcoin, right? That was about it. And that's the stuff I really signed up to defend. I didn't ever want to defend, you know, ICOs that effectively are just giving someone a bunch of cash and they're promising they're going to give you a cool new bitcoin clone. Never wanted to defend that. And I don't want to defend people who are effectively doing financial services, but doing it with a lot of decentralization theater. Now that's not everyone. You just described, you described, you said that. Look, Hayden builds these things with what the Uniswap contract just gets published immutably and then when they want to upgrade or change or, or push new functionality, they just put a new immutable contract in. There is of course something in between full control, where I'm just doing decentralization theater and an immutable smart contract. And that usually looks like something like some sort of Security Council or admin key that affords some small group of people or a DAO or something like that with limited control for cybersecurity purposes. For there's a bug and we need to, we need to pause, we need to fix. There needs to be a time locked window. We're not just going to be able to suddenly move everybody's money. That's necessary. Not necessarily how these things are specified, nor should they be specified, but some incremental level of control. And so how does that enter the law? Those things should not be treated as financial services because you are an infrastructure provider and you've got some sort of reasonable role as the safeguarder of infrastructure, not as a financial fiduciary to customers or something like that. How does it enter the law? So the bill as drafted does a few things and these are not things that were in the House version of Clarity. These are largely things that folks in the Senate were either interested in or were forced to become interested in in order to get sort of bipartisan buy in and a bill that could actually pass. The first thing that I'd say is unlike the House version of Clarity, you have this rulemaking done by the SEC to define this thing called common control. And so this isn't just the SEC doing a rulemaking to say, ah, under the law, I've decided you five people have common control based on the law. It's actually the SEC gets to write effectively what the details of a test for common control will be with guardrails in place. So the law doesn't say that the SEC can say that like software developers just working on the same GitHub repository are for one group of people under common control. That would be, that would be a gross over interpretation of the authority that the SEC has given to define common control. But they can do a lot of things to around the edges and that is a potential threat vector in that if you had a malicious chairman at the SEC who really wanted to treat all software development in this space as fiduciary financial services provision and effectively regulate it, claim jurisdiction over it, they could potentially abuse that rulemaking authority. But it doesn't stop there. Once you are deemed having common control, that feeds into something in title three, section 301, which is this decentralized protocol versus non decentralized protocol rulemaking. This will give your listeners who haven't read the whole bill a flavor of how a 200 page bill can rapidly expand to include a lot of defined terms, a lot of processes. So not only do you have to worry about whether you're going to be in this rulemaking for common control, you then have to ask yourself, am I going to be a decentralized protocol or a non decentralized protocol? And if I'm a non decentralized protocol, part of which the test for that is whether there's common control over the operative parts of the protocol, will I be treated as any existing regulated financial institution? So you've got sort of three steps here, findings of common control which could be too broad, sweeping in too many people, but then that feeds into non decentralized protocol which then if you are found to be a non decentralized protocol. The third question is are you an existing regulated entity like a money services business or a securities broker dealer? So this is a lot. It's very scary. Let me put a bow on it though. This is a lot. And it's, it's this long pipeline that involves lots of uncertain terms. But at the end of the day it doesn't say now you're this new regulated entity. It says now you will be judged based on the existing underlying law today, the, the, the securities laws, the bank secrecy act laws to see whether you fit into those categories. So in a very real sense this could all happen right now. Like right now somebody at treasury, the SEC could say, do you fit into the existing broker dealer definition? Maybe you do, maybe you don't. If this bill was to pass, there'd be these three steps that are perfunctory to them even getting to that question. Are you part of a group that has common control over a protocol? Lots of people are going to fall out of that test, unless it's really badly drafted by the, by, by a malicious SEC in the future. Am I, am I in this category? Non decentralized protocol? That one's actually got tighter guardrails around it, which we could get into more specifics of, but we probably don't need to go into minutia. Do you actually have operative control over the protocol? Do you have custody or control over any user funds? It's easy to fall out of that test and only if you didn't fall out of those two common control and then non decentralized protocol do we ask the question that already regulators would be asking today without those guardrails in place. Are you a broker dealer under the securities law? Are you a money services business under the bank Secrecy Act? So to me, this, this is frightening. And this, there's a lot here. And nobody likes to see non decentralized protocol written in legislative text because it scares them. But the fact of the matter is the existing securities law should scare you, so should the bank secrecy act.

B (17:57)

So if I can summarize, then this seems like one of the many places in this law where basically it's a little bit of a punt to the SEC to say, look, there's a lot of fine distinctions to make here and you are basically given authority as the SEC to go make those fine distinctions, you know, study the character of the different protocols that are out there and weigh the balance of innovation versus investor protection and so on and you go figure it out later.

A (18:23)

It sounds like that's some, some of that with the caveat that the SEC already right now has the authority to figure out almost everything. And this will actually confine their, their degrees of freedom, limit their decision making space in a meaningful way. And then the other thing I'd say is if that was, if that was all clarity was about, Coin center might be neutral about it, we might even be a little uncomfortable. But clarity's got other things in it. It's got the Blockchain Regulatory Certainty act and this is an actual like black letter. Regulators cannot license or register developers for things like money services businesses purposes, which directly creates a safe harbor from things like the tornado cash prosecutions that we saw from the Southern District of New York. And so that is just to me, a watertight fix to one of the clearest threats of enforcement that developers have today. And so if I can get that watertight safe harbor while also curtailing the SEC's jurisdiction, but leaving them a lot of gap filling authority that I'm worried about, but I could see being used well as well. This to me starts to look like a good bargain.

C (19:36)

Oh, what do you think of some of the other parts of the builder? There's components of like, you know, obligations for front end and app developers with respect to like BSA and address screening. And then obviously as VCs, there's a lot of components around fundraising and disclosures. Maybe you care less about that because you don't sound like you're a fan of token sales or anything. Not that we're big ICO fans or anything, but yeah. Curious to get your kind of read.

A (19:58)

So there's this 301 section which is the non decentralized protocol rulemaking. There's this 302 section which is about sanctions authority and front ends. I think that section defines it as application layer providers or something like that. 302 again, is one of those pieces of legislative drafting that the first time you look at it, you're going to go, oh my God, Jesus. Like just the fact that the title is about application layer. Did they define this right? Did they define this too broadly? What kind of crushing obligations are going to apply to those who fit into this category if it's drafted too broadly? And will it basically criminalize everything? Right. Upon further reflection, you read 302 and what you see the 302s doing is not changing any underlying statutory authorities. And I mean, we could complain about that because the underlying existing sanctions authorities are really broad. So it might have been nice if 302 was narrowing that really broad authority of the treasury to sanction foreign countries and then create liability for people who enable transactions with sanctioned entities. That's what this is all about, by the way. So this is all about sanctions authority, which again is like we sanction Iran. Now, if you are an American and you transact with a sanctioned person, you can be held liable, you can be thrown in jail even, and there's even secondary sanctions liability. If you help an American get around sanctions, you can be held liable, right? So again, Section 302 is about sanctions. It doesn't change any underlying sanctions authority. Sanctions authority, however, is already broad, so maybe we wished it would have narrowed it. What Section 302 does do is it directs OFAC, which is the part of treasury that enforces sanctions laws, to issue guidance on how people who are already obligated to comply with sanctions, because all Americans are obligated to comply with sanctions should do so when they fit into this category of application layer provider or front end provider. And that is, that's again, something that's going to scare a lot of developers because you think, oh, I'm. All I'm doing is maintaining a website that provides a view into data on the blockchain and allows people to come and look at that data and interact with it. I didn't realize I had sanctions duties. The problem is that you did, you always did. That's the nature of sanctions laws in America is they don't just apply to financial institutions like the Bank Secrecy act does. They actually apply to everyone. You are not allowed to help other people transact with sanctioned people in North Korea. If you start doing that, you're going to be in trouble. And this is a problem for big Internet service providers. This is a problem for, like Amazon with aws. This is a problem for, for domain registries. Like, what, what if, what if someone from Iran pays me to set up a domain for them? Am I liable for that? And the answer is, yeah, you could be liable for that. And so what 302 is doing is it's saying, look, there's this category of people who are already obligated under sanctions laws, and now OFAC is going to have to issue some guidance on some specific things that they should be doing or can do to comply with their existing obligations. And that may include things like address screening via blockchain analysis and things like that. You know, accepting that, that's going to be an uncomfortable process. It's still probably a good process because right now there's not enough guidance. Right now you might be operating a website that surfaces content for your users and helps them interact with the blockchain. And you might think, all I'm doing is I'm just an information services provider. I'm just like, just a guy running a website. But you could right now be on the wrong end of a sanctions enforcement action. And you didn't have a lot of guidance in advance explaining what you were supposed to do and what you were not supposed to do. Now we can have a larger conversation. Yeah, go ahead. Yeah.

B (23:50)

It also does provide effectively a safe harbor because it says specifically, you know, transactions, transaction monitoring services. Doesn't specify which ones are allowed, but you kind of know, okay, chainalysis and TRM and all these guys who do this, which is also to say that, well, if chainalysis didn't catch it, that's a pretty strong defense that you're not liable. And so I think that's another reason why it's good to share. It's good to bake that in there.

A (24:16)

You know, it's interesting you said that because it reminds me of this interaction I had with someone at OFAC in 2016. So I'll tell, like, old war stories. Back then, OFAC was like, should we add bitcoin addresses to the SDN list? And people were like, oh, my God, you can't sanction bitcoin addresses. That's crazy. Even though it's not crazy at all. Like, there are aliases on the SDN list. There are websites on the SDN list that correspond to people. Of course there should be bitcoin addresses that correspond to sanctioned people. There's nothing unreasonable about that. But I was talking to somebody at ofac, and they were like, you guys should be so happy that we finally added some bitcoin addresses to the SDN list. And I was like, why? And he said, because now there's a box to check. And it's like. And that actually starts to make sense. It's like, all right, I have sanctions obligations. Did I. Did I screen for this address? Yes. Did I screen for this address? Yes. Now you. Now you show your due diligence. Now, this is all kind of crazy because, of course, like, somebody who's sanctioned could just spin up 50 new Bitcoin addresses, and they're not yet on the SDN list, but at least you did something, and you could show compliance professionals that you take your compliance obligations seriously. And we can have a longer conversation about whether sanctions work in the modern era. And that's both a geopolitical question about whether sanctions are actually working to achieve our objectives, and also a technological question. Like, there's so many ways to route around sanctions, and it's not just crypto. It's also the correspondent banking system. Like, those are all bigger conversations.

B (25:51)

We just had a debate about the efficacy of sanctions, I think, on the last show, last episode. Yeah, Venezuela and Katuba, I think they work.

D (25:57)

You know, Haseeb doesn't. But that's a whole.

B (25:59)

I didn't say. Oh. To be clear, I did not say they didn't work. I said they were a blunt instrument. Said they were a blunt instrument.

A (26:05)

I think they're.

B (26:06)

I think.

A (26:06)

I think they're a blunt instrument. And they're also dangerous just from a. Like, their overuse destroys the global economy. Like, if. Like, right. Right now, most of the flow through of global settlement is through Swift, which is an international network of correspondent bankers through a nonprofit in Belgium. And Swift for decades has escaped classification as a directly obligated entity for sanctions purposes, which is how they're able to connect to everyone and that all started to change with Iran and then with Russia's invasion of Ukraine. Now Swift is constantly under pressure to remove people from their network for. Because of sanctions. And as that continues, you're no longer going to have people who maintain networks that connect to everyone. You'll just have all these fragmented systems, which ultimately, crypto isn't it. Huge transaction costs.

B (26:59)

Crypto is basically where Swift was 30 years ago. But, okay, I want to switch gears a little bit and talk about tokenized equities, because one of the core points that was made by Brian Armstrong is this idea that the bill, quote, unquote, kills tokenized equities. So, Robert, obviously you're working on Super State. What's your perspective? Is that true fake news? Tell me. Tell me what your take is on the tokenized equities part of the story.

D (27:22)

Yeah, so this is for sure, some of the language that was widely debated. There was quite a few different perspectives on the specific language that Brian seems to be referencing. He didn't point to the specific sentence and paragraph, but everybody basically knew what the bill as marked up to the point that it was critiqued by Brian said was that. And again, we're talking about things that are clearly securities. The bill, on the whole, tries to make a very clear evolution between something that's an ancillary token to, you know, a network token, and there's clearly things that are neither which are securities because they're not either an ancillary token or a network token. They are a tokenized security.

A (28:08)

Right.

D (28:08)

It's been said many times, both in the bill and outside of it through SEC guidance, that a token or the technology used to record something does not change the underlying, you know, characteristics of the security. So if you take a stock and you put it on a blockchain, it's still a stock.

A (28:24)

Right?

D (28:24)

This is relatively obvious to most people. If you take a bond and you put it on a blockchain, it's still a bond. It doesn't become less of a security or more of a security necessarily by you putting it on a blockchain. Obviously, there's been debate about that. The Gensler administration took a worse view of this, and they said, well, if it goes on a blockchain, that makes it a security.

B (28:46)

Right?

D (28:47)

But there's a widespread understanding that the nature of an asset does not change simply because of the ledger that you're using to record the ownership of it. Now, back to the bell. So the bill had basically one section which said this, and it also said that the SEC cannot make rules or make additional exclusions based solely on the fact that an asset is a token running on a blockchain. And really what this means is that in a lot of people's interpretation, it could potentially hamstring regulators from carving out broader exemptions for things because they are on chain. And it's my belief that this is what Brian was reacting to, was saying like, hey, this boxes in tokenized securities, they're innately different than analog or digital, but not blockchain securities. They behave differently. There's different transparency, there's different settlements, there's different mechanics by which you can own and transfer these things. So maybe we do need different rules somewhere, some way. Maybe the involvement of broker dealers can and should be different if it's on a blockchain. Right. Maybe, you know, the reporting could be different if it's on a blockchain because there's differences innate to how it's recorded. And the bill kind of shut that down. It said, you know, you can't give a special carve out to something just because it's on chain. And this is obviously contentious. You know, there's a lot of people that believe that it was just restating the obvious and restating things that are already a matter of understanding.

B (30:27)

What's your view? What's your view on the language?

D (30:29)

Yeah, my view of the language is that there's always the ability for a regulator like the SEC or the cftc, even if you know that bill passed exactly as is to allow technology to improve markets, to change the rules, to say things like, hey, a system that's transparent and settled amongst its members.

A (30:51)

Right.

D (30:51)

And this could be a database or a blockchain or a new thing that hasn't been invented yet, has a carve out of the rules or hey, this doesn't have to conform the exact same way to, you know, the NMS standards of pricing. Or you could make changes to the securities laws that apply to all securities. Right.

B (31:13)

And so you could work, you think the SEC could work around it in order to get the right answer?

D (31:17)

Absolutely, absolutely.

A (31:18)

And not only that, I'd say that they should because it'd be wrong to privilege one technology over other technologies, especially in this intermediary moment, intermediate moment within technological evolution. Just because you take a fundamental economic reality, an activity that people are engaged in and embodiment, embody it in a different form. Paper, the, the dtcc, a blockchain shouldn't change how we treat that fundamental relationship between issuer and investor. And yeah, we're maybe going to regulate intermediaries differently because they're using some of these different tools differently. But we wouldn't want to say because you used a slightly different tool, you're suddenly in a totally different bucket. No, you're still doing some kind of securities intermediation. And so we should have activities based standards, not technology based standards. Exactly.

D (32:09)

It can and should be the catalyst to just update the whole system, not a carve out specifically for crypto. Knowing that we now have securities on blockchains, the whole thing has to be upgraded. Is that as fast? No. Is it as easy? No. But can and should regulators do that? Yes. And so I don't think this bill closed the door on tokenized securities. And I say that as somebody who is building tokenized securities. I think it in some ways was just restating the obvious and saying, like, it is hard work at the sec. They can't just take the quick path to say, oh, it's a token, therefore no securities laws apply anymore, but that they will, through rulemaking and guidance and all these other things, update the system. And they've been doing that ever since Atkins came into the administration. Like almost every month, there's been this drumbeat of updates that have been occurring. I don't think this bill would stop that. I actually think it would accelerate that.

B (33:04)

So I guess the counterpoint, I've seen some of the criticism on the other side saying that, well, why is this bill hemming in the SEC and commanding the SEC on certain ways of regulating this stuff? Shouldn't you be deferring more to the regulator, who's more of an expert on this? And the argument you're making, maybe the analogy that I would draw is something like imagine that the sec, or let's say the fcc, which at one time regulated primetime television. And then you have the advent of live streaming, and you say, well, there's a law that says that you are not allowed to regulate things that go over the Internet any differently than go over the airwaves. And you might think like, well, okay, this sounds awful. Why are we regulating live streaming the same way we're regulating television? People might say, well, the FCC could write a rule that is not about the Internet versus airwaves, but instead is about UGC or about individuals versus companies versus prime time, whatever. There's all sorts of ways in which you could route around these rules. But the spirit of it is obviously that, well, yes, it's still a security, or this is still mass communication, but technology changes things. And to your point, Robert, I mean, this is why you do what you do is the idea of instant real time disclosures, instant real time visibility, instant real time knowledge of who holds what and how a cap table is changing. And then from that having this end of weekend of day, two day reporting period type granularity just doesn't make sense. Anyway, I think that's the. If Brian Armstrong were in the room, I imagine that's the counterargument that he would make.

D (34:41)

Yes. But I don't think this bill would require anyone to make the statement like this prohibits tokenized securities from existing. Like, you know, his view on this was, I think extreme to the point where, you know, I disagree. Like tokenized securities exist right now. Superstate is creating a framework for tokenized securities as the rules are set up pre clarity to operate not in just, oh, it's a security on a blockchain, but in a, hey, it's composable with defi and it can do interesting things and you could do like on chain, new things with it. Right. Like I don't feel that boxed in with the pre clarity rules. And I don't think the clarity, you know, markup would make that worse.

A (35:28)

Right.

D (35:29)

I just think that it removed the opportunity for some free pass for tokenized securities that the SEC probably wouldn't have gone down the road of anyway.

B (35:40)

Sure. Okay, let's talk about the last flashpoint in the bill, which seems to be yield particularly.

D (35:47)

Well, this is the big flashpoint, the tokenized security.

B (35:49)

This is the big flashpoint.

D (35:50)

Navy matters.

B (35:51)

Yield matters. The yield argument seems to be the thing that everybody is fighting over. And supposedly this seems to be the thing that the White House is also incensed by. That coinbase has maybe broken rank with respect to being willing to compromise with the banks. So the big banks have basically said, we want to trade up and potentially fix this loophole that existed in the genius act, which is that stablecoins can pay rewards and rewards finance is infinitely creative, people. If you give them an inch, they'll take a mile. And the idea is that, okay, if you give rewards, you can make rewards that are basically isomorphic to giving yield. And the banks say, no, no, no, no, no. It is very, very important for us to protect this line that stablecoins cannot pay yield. And the argument I think that the banks have largely levied is that if stablecoins are allowed to pay yield. So stablecoins of course are basically narrow banks. They're full reserve banks, meaning that they operate very differently than traditional banks which are lending out their deposits for creating mortgages to small businesses to whatever it is that they're doing making loans in the economy. Stablecoins don't do that. Stablecoins just hold the assets in Treasuries or in other low risk assets and they just make money on the float. And if they start lending out their deposits, so if they start paying back the yield, then banks are going to have to start paying back the yield. They're not going to be able to take those assets and extend loans. And that on the whole is going to contract credit in the economy and most importantly lower the profitability of banks. So that's the core argument as far as I can see it now. The other day on Twitter I elicited people trying to give what's their best argument for why banks should not be or why the bank's argument should go through that stablecoin should not be allowed to pay yield. And many people gave. Many people were like yeah, because the banks are assholes. Some people levy. This argument that I just described to you. Oh, it restricts credit creation. It's bad for lending. The argument I thought actually was the most interesting, which I had not heard before, is that it leads to moral hazard being that this is going to cause essentially a perception that stablecoins are safer than banks and this is going to cause banks to have to compete by paying more yield, but they're still going to want to be lending out assets and all this stuff. And essentially it's going to cause because there's a government backstop on all these things, especially one, if there's deposit flight to stablecoins stablecoins are going to gobble up more and more of US deposits. And if they do that there's going to be an implicit put. It's going to be so systemically important. If people are pulling money out of banks to put them into stablecoins and get higher yield than they would get in banks, then now there's effectively moral hazard in the system that doesn't have FDIC insurance and people are going to be compelled to bail them out. So I thought that was an interesting argument. I'd never heard that before. I'm curious to get your guys take on the stablecoin yield battle. Tom, why don't you start?

C (38:48)

I hate this chomp.

B (38:48)

It's a bit.

D (38:49)

You hate this E2E2.

C (38:52)

There's so many issues. First of all, I find this whole thing to be very silly because people are talking past each other. If you read the actual text around yield, so it says, you know, digital asset service provider cannot pay any yield for holding the stablecoin but there's all these loopholes that you could, you know, drive a truck through. It's like they can give incentives for a transaction or a payment or use of a wallet or use of a platform or use of an application or a loyalty program or a promotional program. And like there are so many ways you can actually give yield as a stablecoin issuer that like, that isn't just holding a stablecoin. I find it extremely hard to believe Coinbase and frankly anybody could not find a way to do the thing that they actually want to do. So it feels like people are just kind of talking past each other a lot. But this other point is there already is moral hazard. It already is. The point is that you as a depositor and you as a bank, the banks are lending out money on your behalf and you aren't receiving any of it. And so it's like already the profits are being privatized and obviously backed up by the government. So I'm like, this is already the case today. And then two, it's like obviously the market is dynamic and in a world where hey, maybe and banks are seeing some capital flight or they're not able to issue as many mortgages, there are obviously other lenders in the market. There are private credit funds or other types of lenders that will issue these kinds of things. And it's silly to think that oh, they would not see an uptick in business if hey, there's yield compression or there's more competition in the market. And three is like, look, I think this story that hey, people are going to pull their cash out of US Banks and put them in stablecoins is just kind of silly. One, most people just leave their capital in savings accounts today in a G sib that's paying them zero percent. So it's not like this is a hyper efficient market that's already trying to optimize for yield and sort of compressing margins super aggressively. And two is like, look, today most of the install base for stablecoins is international. It's not like your mom and pops in the Midwest are saying, hey, I'm going to pull my money out of my local community bank or Wells Fargo and go put it in usdc. Maybe that will happen many, many years from now, but in the interim this is obviously super good for dollarization and obviously sort of marginal treasury buyers. So the whole thing is just like, I don't know how people are kind of arriving at these arguments.

D (41:03)

They're arriving at the Arguments because banks see a huge risk to profitability. The way they would compete in the absence of changing the rules is they would compete by raising the interest rates they pay depositors.

A (41:17)

Fact.

D (41:18)

And that goes directly to net interest margin and directly to the bottom line. And that sucks.

B (41:23)

Okay.

D (41:23)

That would shave off probably hundreds of billions of dollars of market cap of US Banks. If they had to do that, if there was a major immaterial flight out of deposits, they'd have to, God forbid.

C (41:38)

They create some consumer surplus. You know, Agree.

D (41:41)

They would have to replace that funding with other forms of financing that will not come at zero and it goes straight to profitability and it sucks.

B (41:49)

So the motive here come up with. Let me ask a very basic question. Let me ask a very basic question. Okay. There are a lot of banks in the US There are a lot of banks, Right. Even among big banks.

D (41:57)

I'm not arguing for the US I'm not arguing for.

B (42:00)

Yeah, yeah, no, of course, of course. There's maybe like five mega banks in the U.S. right. They already compete with each other. Right? Yeah. They're nationalized and whatever, but they already compete with each other. Why aren't they already engaged in deposit competition to pay higher yield to consumers? Right. Under Tom's theory, it's like, okay, well the person in the Midwest doesn't care. They leave their money where it is. Otherwise, like, why wouldn't another bank already be raising their rates? So doesn't this theory imply that it wouldn't affect the bank's bottom line even if stablecoins were paying higher yield?

D (42:30)

Yeah, I'm just showing the motivations here. I think that there's a world in which there is a little bit of a soft oligopoly amongst the banks.

A (42:38)

Right.

D (42:39)

Their rates are public. They can all see in real time that no one has really moved up off of0 since 2008. Right.

B (42:47)

So you think it's basically price fixing. You think the banks are price fixing, defecting.

D (42:53)

I can't accuse them of actual price fixing. It's just that in the aggregate rates have basically deposit rates of been stuck at zero since the great financial crisis. That's roughly what the case has been.

A (43:06)

Right.

D (43:07)

Prior to that, banks in general paid rates that were almost like Fed fund minus. Okay. Ever since that, that broke the deposit structure entirely. And rates have basically been zero everywhere since. Right. You have some like Internet banks and lower quality banks that have to pay like competitive rates to attract depositors. But for the most part, the largest banks are stuck at zero. It's like soft oligopoly I don't think there's direct rate fixing. I don't think they need to. I don't think it's that difficult. They're like, well, everyone else is zero. Like, you know, we're good. I just think that there's a huge motivation to protect that because that is the root of net interest, margin and profitability of these structures. And so, you know, I see why they're afraid.

A (43:50)

Right?

D (43:50)

I don't think that they should prevent a better product from coming along and eating their business. I don't think anyone should use the legislative process to prevent improvements from coming in. But they have all the tools to act like a stablecoin. A stablecoin is like a narrow bank, okay? Like you can set the rates at zero. You can set the rates at fed funds. You know, you earn roughly fed funds, you do whatever you want. The stable coins today are basically paying zero. They look a lot like the banks. They're extremely profitable because of that. Tether is a phenomenal business. USDC Circle, Coinbase on this are very good businesses. They look a lot like banks. They pay zero. They collect the whole nim.

A (44:31)

Okay?

D (44:32)

I guess everyone's just worried when that game changes. And I would like to see everyone raise rates like stablecoins and banks. It would be better across the board if everyone had a bit more competition there.

B (44:46)

Peter, what are we missing in this conversation?

A (44:48)

I think you actually got it. I agree with Tom that the prohibitions are, I think, actually not that severe. Like you're going to be able to build products and create customer experiences that you're going to want to create irrespective of the technical limitations on payment. Stablecoin issuers offering yield. This is a very narrow area. Like genius. The stablecoin legislation doesn't touch anything in decentralized stable coins, algorithmic stablecoins. It's really just for USDC and tether, things like that. So I think, I think there's a bit of a tempest in a teapot situation going on here in that this, this isn't even a particularly drastic restriction on the activities that payments stablecoin providers are going to be allowed to do.

B (45:35)

So it sounds like the consensus is that we're overreacting.

A (45:38)

I also agree with Robert that, you know, I'm not here to stick up for the banks either. I think more competition would be good. I think he's 100% right that it's ridiculous that we don't see deposit rates on deposits changing since the global financial crisis. Something's obviously broken and, and so Coin center doesn't take a position on this section because we're here to stick up for developers and infrastructure providers. And this is really about how two distinct centralized players, banks and this new category of federally regulated cryptocurrency businesses, how they will divvy up what they're each allowed to do. And another question I have, and I am not a compliance attorney at a major bank or at a major crypto company, but I do have to wonder, why not just get a bank charter then if you're a crypto company that wants to engage in this, and there are good answers to that, it's like, well, the regulators were hostile to ever offering charters to people like us. And that was true in the last administration. But maybe that's changing. I do think that's changing. And then to Robert's point, I think a second ago, banks can actually engage in stablecoin activity. Now there's a huge section of this bill on bank permissible activities, and it effectively opens the floodgates. So this is all just very frustrating to me because to me, there's some very real privacy and liberty gains in the Blockchain Regulatory Certainty act and in the developer protections that are constraining SEC and Treasury discretionary. And we are at risk of losing those legislative gains which will protect ordinary developers, because people are fighting over yield. Because as you said, that's what everyone's fighting over. Steve, not everyone is fighting over that Coincender doesn't care. Even Kraken signed on effectively to the language that came out of Senate Banking. So a lot of the other larger US Exchanges seem to care. Right now it just seems to be Coinbase and the banks fighting over this one provision. And that's frustrating.

B (47:40)

I mean, well, Coinbase does have a direct interest in Circle, or I should say in USDC yield. Although in some way you could even take the other side of that, which is that if you mandate that stablecoins are not allowed to pay rewards, they're not allowed to backdoor pay yield, that does effectively curtail competition. Right? It makes it so that Circle and Tether cannot really effectively compete with each other or even with new entrants, which means you're competing solely on brand. And if you're competing solely on brand, that really does actually entrench the existing players. Let's imagine that you mandated that for banks, banks are not allowed to pay yield on deposits, period. Just as a thought experiment, let's say banks are not allowed to pay yield. Why would anybody ever use a community bank why would they ever use one of these new banks that does pay higher yield than JP Morgan or whatever? So it is in a way, I mean, I don't know how fully to think about this, but in a way, why isn't that good for Circle for rewards to be banned? Because now it effectively means that, well, your business model is that you have 100% net interest margin, it's mandated by law to have 100% net interest margin, and that just effectively the competition curtailment is not between you and the banks, it's between you and other stablecoin entrants. So if stablecoins grow massively internationally and today, obviously the most demand for stablecoin is international, you might, you might say, like, look, I don't really care that much about winning business from the banks. If I have to give out all my net interest margin and yield, it's not really worth it to me. I'd much rather go in an international monopoly or a duopoly between Circle and Tether and say, well, nobody else can compete with me internationally because I have such a huge brand and liquidity advantage and my net interest margin stays at 100% and it just means I basically have no domestic business. Who cares? I don't know. I could kind of see it being good for the silicon issuers. I don't know. Tom, Rob, what do you guys think?

C (49:30)

Yeah, I think that's another good argument. But again, I also don't know why they're making a big stink where it's just like, there are so many ways and to do the thing that they're already doing today, which is like, yeah, of course Circle's not paying yield to USDC holders directly. You get it through intermediaries who pass it through you. And there's a million ways to do that with the text.

B (49:50)

And that is not disallowed by this new language. No language.

C (49:54)

Yeah, that's the language I ran through. Those are all the exemptions too. So it says you cannot pay yield to stablecoin holders other than these 10 other ways you can do that.

B (50:04)

When you deposit on Coinbase, you can get yield on usdc, right? That's platform yield.

D (50:08)

They give you rewards and that reward is. The calculation of. It looks very interesting. Okay, so the calculation of those rewards, balance times rate times time. So that's like the one thing that seems prohibited is balance times rate times time. If they're like, oh, you know, you get some rewards based on every day that you log in. Or like, oh, you get rewards every time you Click the trade button.

B (50:32)

Or, you know, I'm pretty sure that right now I get rewards. Just balance times rate times time. Right, Correct.

C (50:38)

Yes, but it's a loyalty, right. If you're Coinbase one, you get higher rewards than if you're not Coinbase one. So that's a loyalty program. Or you can get rewards for being a liquidity provider or pursuing governance. There's like very plenty ways to like.

A (50:50)

Or.

C (50:50)

Yeah, and by the way, or Coinbase is an application. Like it's, you know, the whole thing's very silly.

B (50:55)

Yeah, right.

D (50:55)

And the simplest way is they say, oh, like we convert all USDC to USD balances and pay a reward on USD balances.

A (51:04)

Right.

D (51:05)

And then you can withdraw USD.

B (51:06)

Oh yeah, yeah, yeah. Interesting.

D (51:08)

There's so many hacks for them to get around this. I don't know why so hard on this because if you gave Brian 30 minutes to come up with a solution, I think he could have like.

A (51:19)

And I see. And I'll add that it's that the pushing on this is a little dangerous because it's a, it's a small number of Republicans that I think are, are comfortable with the banks taking a hard line here. And that means if you lose a couple Republicans in the Senate, you're going to have to pick up a couple of Democrats. And I'm nothing against Democrats, but the Democrats are generally the ones pushing for much stronger, stricter sanctions and anti money laundering rules and more potential liability for software developers. That's just the state of the state of affairs right now. So if this becomes the sticking point and those Republicans who are currently siding with the banks on the yield issue don't bend, then we could be looking, if we get a bill at all voted into law, we could be looking at worse outcomes for software developers because somebody made a deal on national security and anti money laundering policies on the Democrat side.

B (52:11)

Well, if you can get yield for logging in, maybe it's a comeback for Tap to Earn. You know, you just click your button enough times a day, you get your rewards. Yeah, I think that could be.

C (52:21)

Clicks are not prohibited. So, you know.

B (52:22)

Yeah, yeah, yeah, yeah, that's true, that's true. Okay, wow. All right, so to wrap things up, Peter, as I mentioned, Polymarket right now is pricing the odds of this thing passing at 40%. You seem to take, want to take the over on that. You think that actually it's being overly pessimistic. Talk to me about what you think is likely to happen from here and what are the next milestones we should be looking for.

A (52:45)

I mean, maybe change our perception. Yeah, I mean, maybe I'm just blinded by my own, like Bayesian updating. But if you'd asked me months ago what the odds of this stuff working were, I would have been way more bearish because we hadn't even seen what was finally going to come out of Senate banking. Because as we discussed earlier, Senate banking isn't just going to take what the House passed and say, yeah, we'll do this, they're going to rewrite all of it. And what they rewrote was largely despite being scary at times, like rulemakings about non decentralized protocols and things that weren't in the House version, when you actually dig into the details, they were quite reasonably calibrated. And so I am still at this point of relief that we're actually at a negotiating table with the votes to pass most of this bill as it's drafted. I wasn't expecting to be here. And we have this hiccup over yield and it's a highly visible hiccup. And it seems to also involve some big egos like Trump talking about how it's his bill, not Brian Armstrong's bill. And that can get ugly. So maybe I'm over indexing on legislative substance and under indexing on what politics has become these days, a bunch of big egos. But to me, we're still so damn close. Far closer than I ever expected us to be on actual policy. Like the BRCA is in there, it's not coming out. And that means that Coin center can get on board because we're going to be protecting software devs, the compromises over SEC jurisdiction. It's still going to be narrower than it was before. But yes, they're going to have some room for rulemakings to define important things like common control. To me, on the policy margins, a miracle has already happened getting us to this point in the Senate. But I don't know, like there is a chance that you stumble because of little things at the end and so.

B (54:32)

Right.

A (54:32)

Not very satisfying answer, but that's where I think we are.

B (54:36)

We're in a not very satisfying moment. So with that, Peter, where should people follow you and follow the work of Coincenter and what should be keeping an eye out in the near future?

A (54:44)

Yeah. So everything Coincentre does is@coincenter.org we're an independent nonprofit here to defend the rights of software developers and infrastructure providers. You like what we do, please consider donating to our mission. What's going on apart from this you know, this is like the main show right now. The House is starting to take a closer look at tax reform in crypto, which could actually be quite important on things like a de minimis carve out for small value transactions from cap gains, more reasonable treatment of block reward taxation. I'm totally getting you all interested in tax law, aren't I? That's probably, that's, that's probably what's next. But we'll keep looking out for the technology. And thanks for having me on the show.

B (55:29)

Very excited. Well, thank you for everything that you guys do. Godspeed. And we'll be keeping an eye out for future evolutions on this bill. That's it for this week. We'll be back next time. Thank you, everybody.