Big Banks vs. Big Crypto

0:05In January, the CEO of Coinbase, Brian Armstrong, went to Davos, the famous conference in Switzerland, where bigwigs schmooze and give talks. But at least one person there was not happy to see him. At one point, when Armstrong was sitting in a lounge, having coffee with former British Prime Minister Tony Blair, Jamie Dimon walked over and interrupted and he said, you are full of s**t and he pointed his finger in his face and told him he needed to stop lying on TV That is just like not something you see every day The CEO of JPMorgan Chase, the biggest bank in America getting in somebody's face like that It was a unique scene in a public setting also where lots of people witnessed this encounter because it was sort of out in the open in Davos, and it spoke to how the gloves have totally come off between both sides.

1:01How did Brian Armstrong respond? We're told Brian Armstrong sort of kept his cool largely. That's our colleague Amrith Ramkumar. He covers tech and regulation. He says that the Jamie Dimon-Brian Armstrong confrontation was about how Armstrong had been saying publicly that banks were trying to sabotage some crypto legislation. Legislation that has banks and crypto firms pitted against each other. This fight is really about the future of finance in a lot of ways. It's about how quickly the crypto economy will be embedded in our financial systems. So the future of these discussions will probably shape how every single crypto product will be regulated.

1:45And that will have a massive impact on the financial system of the future.

1:51Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Tuesday, March 17th.

2:04Coming up on the show, the showdown between the crypto and banking industries.

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3:24The 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 U.S.

4:05dollars. Companies that offered stablecoins started paying interest-like rewards to people who bought them. And in 2018, Coinbase, the largest U.S.-based crypto company, started doing that too. So Coinbase has a partnership with the Stablecoin issuers Circle, where Coinbase shares a lot of the revenue with Circle and gets to offer Circle's stablecoin on the Coinbase platform. And as part of that, Coinbase offers holders, essentially yields, annual payments, steady rewards payments that translate to about 3 % to 4 % a year.

4:44Coinbase CEO Brian Armstrong has made no secret that he wants to give banks a run for their money. Armstrong's open about this and has talked about it in interviews. He has said, we want to compete with the banks and we want to eventually replace them, essentially. So it's sort of their state and mission. Here he is on Fox Business last year. 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 on trading. To compete with banks, Coinbase has been adding more and more services over the years.

5:15They began offering trading in other types of cryptocurrencies. They've begun offering payments. They've also started letting people trade stocks. So their idea is really to become this super app that you can do any type of financial transaction, essentially. And that is the way they've said they want to rival them in a lot of these businesses. 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.

5:53Coinbase 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 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 three or four percent? Coinbase is trying to keep as many people on its platform and using its products as possible. So the stablecoin market is pretty competitive.

6:29So everyone is sort of competing to keep consumers on their platform and trading their stable coins. And so 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 cryptocurrency products are not because of how volatile they are. And if this partnership were to go away and these rewards were to go away, they were told it could be worth billions of dollars to Coinbase's bottom line over many years.

7:08Rather than making money by lending out deposits like banks do, Coinbase makes money through the rewards program with Circle by investing the U.S. dollars that underpin the stablecoin into short-term U.S. Treasury bonds. Banks aren't happy about this. 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. Coinbase and others don't have to follow the same regulations.

7:50They 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. 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. Coinbase and others argue that's basically providing different services to consumers on its platform.

8:29And 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. 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. The United States will be the crypto capital of the planet and the Bitcoin superpower of the world, and we'll get it done.

9:04The 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. 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. And the first bill that got passed was called the Genius Act. It helped set standards for stable coins that the industry had been desperate for.

9:41It was the nation's first law codifying standards for crypto, so it was sort of a watershed 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. 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.

10:20But 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. And so people argued that under that law, exchanges could pay rewards. And so Coinbase and others were very happy with that. You know who wasn't so happy? the banks. That's next.

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12:28After 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 I 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. Market structure is sort of this holy grail because it's, again, it's in law how to regulate the space. this is X, Y, Z, what we have to do as a crypto firm, and this is what the regulators oversee, and this is how the process works.

13:07The bill is hundreds of pages long. It's really wonky regulations outlining how every type of cryptocurrency will be regulated. And so things were going along and 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. 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. And so as these discussions start, it becomes clear to the banks that they have a bit of a problem in that crypto exchanges like Coinbase are allowed to pay these rewards and yields.

13:55So banks sort of realized that they need to essentially start a big fight over it. 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? Banks just face really tight capital requirements. 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. And so banks say, Coinbase, if you want to be a bank, be a bank. if you want to be a money market fund, be a money market fund.

14:30But 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. 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. So the banks have said if you start chipping away at that with these products, Like we might have serious problems. And it's important to note that it's a lot of the community banks in like states across the country that have raised issues with this.

15:04And that's why it's had such a big impact in the Senate. So you have senators like Tom Tillis, North Carolina, Mike Rounds, South Dakota, Katie Britt, Alabama, and others like John Kennedy, Louisiana, where they have these relationships with community bankers going back a long time. And when you have bankers calling you 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. Here's Democratic Representative Bill Foster discussing these concerns at a hearing in February.

15:46They had a fear that interest-bearing stablecoins would just drain the deposits from small community banks and take away one of the only sources of capital that small communities have. The bill passed the House. But when it got to the Senate, it started running into problems. And so all of that was sort of coming to a head when the banking committee scheduled a markup where the committee would vote on it last month. And there were discussions that there were 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 Capitol meeting with senators that day.

16:30And Armstrong also started going on TV and giving interviews. 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 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. And he basically became convinced there is 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.

17:05Basically, 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.

17:18So 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. There are other aspects that crypto executives 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. This is what had gotten the attention of Jamie Dimon, the CEO of JPMorgan Chase, and led to that confrontation with Armstrong and Davos.

17:57After Armstrong's post, the Senate Banking Committee postponed the markup and the vote. And 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. Why is the rewards issue so important for Armstrong? Armstrong is essentially weighing the long-term benefits of clarity to the crypto ecosystems to Coinbase. And there are a lot. You would have presumably more trading in these assets, more investor confidence, and all of that would flow through to the bottom line.

18:36versus the short-term importance of stablecoins and the profits from rewards to Coinbase's business in the next, let's call it, two 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. So losing those in the short term 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. It's incredible that Brian Armstrong, this one man's opinion, had such a big impact on this piece of legislation.

19:20It speaks volumes about Armstrong's influence and just the elephant in the room that Coinbase is with a lot of this. Coinbase is by far the biggest crypto lobbying presence in Washington. They've just invested so much more than other companies in lobbying. They're seen as sort of the make or break player. And there are other companies and there are trade associations, but Coinbase started or donates the most to to fund a lot of the trade associations. So they are seen as sort of the stamp of approval. Armstrong pushing the button and being the one to get out in front of it, it does speak volumes.

19:59What do you think it'll mean for the crypto industry if this act is not able to be passed in the foreseeable future? 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 how investors and others view the sector 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.

20:54Spotify and 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 at Ryan underscore Knudsen.

21:13Thanks for listening. See you tomorrow.

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