Wall Street and crypto battle over the future of money

0:01So, Nikou, I want to ask you to pull up your phone and if you could go to your banking app. Okay, well, I bank with Starling. Let me get my phone out and log in. Okay, once you're logged in, tell me what are the last three things that you bought? So, my last three things are my tube fare to get into the office this morning, the coffee that I bought this morning and then also yesterday my Spotify bill went out of my bank account as well. Sounds like a typical weekday routine there. Yep pretty much. Well so Niku the reason I just asked you to do this is because as the FT's digital markets correspondent you've been covering how these kinds of purchases using your phone might actually one day involve cryptocurrency.

0:51Yes, absolutely. I mean, when I was buying my coffee or tapping my phone on the tube, I wasn't thinking about what's actually happening in that transaction once I tap my phone to pay. And I doubt you do at any point either. But crypto companies are looking to change that, the plumbing, the technical stuff that happens once you pay, how you pay and what you pay with. Right now, we pay in U.S. dollars or British pounds or whatever other currency you use. Crypto companies think we should be using stablecoins instead. Now, stablecoins are essentially a type of digital cash that's pegged one-to-one with sovereign currencies like the dollar or the euro.

1:30And crypto fans say that stablecoins are better than the money we use at the moment because they're faster and cheaper. And essentially, they really think that the financial system we have at the moment can and should be improved. But not everyone's so enthusiastic about this idea. Wall Street banks are pushing back on some aspects of crypto, and especially when it comes to payments and to being used as part of the financial system. They see this as a risky expansion that potentially threatens the stability of the financial system as we know it.

2:11I'm Michaela Tendera from The Financial Times. Crypto companies are trying to make their stablecoins part of mainstream finance. But Wall Street's fighting back. Who's going to win out? That's what we're talking about today on Behind the Money.

2:44Hi, Nuku. Welcome to the show. Hi. The last time you were on the show was a little over a year ago, and we were discussing all the opportunities that might open up for crypto companies during President Donald Trump's second term. So what has come to fruition in that time in the 12 or 14 months since you were last here with me? What have crypto companies seen change? so much so so much i mean for a start they aren't being sued by the u.s government which was a huge point of contention and they're in fact being accepted under trump who's promised to make the u.s a crypto capital of the world he's made crypto a national strategic priority trump himself a lot of his cabinet a lot of his family are big fans of crypto there is a company run by trump's sons and friends.

3:39That is called World Liberty Financial, and that launched its own stablecoin last year. And at the same time, Trump has appointed crypto-friendly regulators and people to head up lots of different agencies. What has that friendliness meant for crypto companies? For crypto companies, they have, for example, been applying for national trust bank charters, which allow them to carry out some activities such as custody and brokerage services and gives them a sort of stamp of federal approval. There's also the potential of some crypto companies having access to a sort of slimmed down version of a Fed account, which would plug them directly into the Federal Reserve's payment rails.

4:20Very recently, crypto exchange Kraken became the first, saying it had been granted access to the Fed's core payment rails. This would really have been inconceivable under the previous administration because they were perceived as so much more hostile to crypto compared to the Trump administration. One of the most important changes to help crypto muscle its way into U.S. financial systems came last year.

4:43Nikou Asgari: Yeah, we worked hard. It's a very important act, the Genius Act. They named it after me, and I want to thank you. That's President Trump speaking from the White House over the summer. This is really a big day. This afternoon, we take a giant step to cement the American dominance of global finance and crypto technology as we signed the Landmark Genius Act. So that was called the Genius Act. It was passed in July and it was a landmark law for regulating stablecoins. Certainly a big day for the crypto industry, a big win for President Trump. The first crypto bill in US history was just signed into law.

5:23A landmark bill establishing a regulatory framework for the roughly$250 billion cryptocurrency currency market known as stablecoin has become law. Well, this is the first US-wide federal law regulating stablecoins. It was really important because before this, the crypto companies, the Wall Street banks, asset managers, you know, anyone that is interested in payments, that's interested in money, found it quite difficult in the US to deal with stablecoins and to deal with crypto because they were worried that the US government might come after them. Now they have these rules. They have these guardrails in which they can operate because the U.S.

5:59government has essentially approved stablecoins by passing this law, encouraging companies to use stablecoins within these guardrails.

6:05Nikou Asgari: This revolution has the potential to supercharge American economic growth and empower billions of people to save and transfer in U.S. dollars. It's really all backed by the dollars. It's really a great thing.

6:23So I want to talk a little bit about the reaction to this being passed. Let's start with the crypto executives. How did they react to this? I mean, absolutely delighted. A lot of them, so Brian Armstrong, the CEO of Coinbase, Jeremy Allaire, the CEO of Circle, the stablecoin company, they were there at the White House when Trump signed the final bill. This is really the beginning of a financial revolution here in America. With the passing of this, we've got crypto stablecoins now that can be built right here in America to make every payment fast, cheap, and more global. That's Coinbase CEO Brian Armstrong.

6:57He and several other crypto execs appeared in a promotional video published by the White House after the Genius Act passed. And Jeremy Allaire, the CEO of the stablecoin issuer Circle. This is foundational legislation, foundational regulation that is going to unlock the power of the Internet in rebuilding the financial system. So crypto companies are happy about this bill becoming a law. But Niku, what about the reaction on Wall Street? How did U.S. banks react to this? Wall Street banks welcome the rules because it gives them guardrails in which to work. If they want to issue stablecoins themselves, if their clients want to use them or trade with them, it gives them the comfort and the confidence to say we're doing this within U.S.

7:41rules. The important point is that banks aren't against the concept of stablecoins themselves. But now they are also cautious because ever since the Genius Act passed in the summer, They have been lobbying heavily in Washington to roll parts of it back. What are they trying to roll back? Wall Street banks are very worried about one particular element of the Genius Act, which is the fact that crypto companies, exchanges like Coinbase, like Kraken, like Gemini, they can pay interest to stablecoin holding customers like me and you. So if I've got a Coinbase wallet and I'm holding some USDC, which is Circle Stablecoin in there, I can earn interest in the US on that from Coinbase.

8:26So why are the banks worried about this specific part of the rules? So the banks are calling this the interest loophole. Collecting interest on deposits is what banks do. It's why you put your money in your bank because they get the deposit and then you get the interest. What the banks are worried about is crypto companies encroaching on their territory. They're worried about something called deposit flight, which is if you move your money, your deposits out of your bank and put it into a Coinbase or a Kraken wallet. If everyone does that en masse, they're worried about this movement of money away from the traditional banking system and into the crypto companies instead.

9:01What would the incentive be for me to, like, why would I put all my money into a stable coin and have Coinbase give me interest when my bank gives me interest? Some of these crypto companies can pay higher interest than you'll get at your bank. And so if you see there's a higher interest on offer, then there's a possibility that you'd move your money to get that higher interest. And since stablecoins are pegged to mostly the dollar, it would almost be like holding cash just in a different type of way. Stablecoins are just digital crypto cash. Well, how many deposits could realistically migrate into stablecoins based on this so-called interest loophole?

9:41Have you seen any estimates? Well, the numbers for that are just very varied. There was an economist at the Fed who showed that as little as$65 billion worth of deposits could move from banks into stablecoins. But then if you talk to the bank executives and the bank lobbyists, they will point to treasury analysis that showed about$6.6 trillion worth of deposits could exit the system. And these are very vastly different numbers, which points to the fact that we just don't know yet. What is the macro concern there that banks see with their customers moving their money over to an exchange where they're getting paid interest that way?

10:23On a bigger level, if it's me and you and then everyone you know, and then all the businesses that you know moving their money away from where they're held at the Wall Street banks and into crypto companies instead, the banks say that this means that crypto companies will essentially be creating a parallel financial economy. And they're very worried about this issue of deposit flight, because if the banks don't have our deposits, they then can't lend out to businesses. They can't lend out to mortgages. They can't do those sort of core banking activities that they're there to do. If you look at some studies I think were done by Treasury, is that they say you could see upwards of$6 trillion in deposits flow.

11:01That's Bank of America CEO Brian Moynihan speaking on an earnings call in January. So when you think about that, that takes lending capacity out of the system. And that is the bigger concern that we've all expressed, that if you move it outside the system, you'll reduce lending capacity of banks. That particularly hurts small, medium-sized businesses. And so that's the issue that people have to struggle about. And he's not the only one vocally opposing this so-called interest loophole. Listen to Jeremy Barnum from JPMorgan Chase. He's the bank's CFO and said this on an earnings call several weeks back.

11:37The creation of a parallel banking system that is sort of, you know, has all the features of banking, including something that looks a lot like a deposit that pays interest, without sort of the associated credential safeguards that have been developed over hundreds of years of bank regulation is an obviously dangerous and undesirable thing. And so that is the core of our advocacy. He's saying that crypto companies are far, far less regulated than banks. And so if they're becoming a sort of quasi-bank, quasi-financial system without the same sort of regulations that apply to J.P. Morgan and to other banks, then when things go wrong there'll be a far worse impact.

12:21So Niku what might that look like? So stablecoins are backed by a pool of reserves that is mostly safe assets like U.S. treasuries. If a stablecoin issuer doesn't have the reserves that it says it has or if its assets are illiquid then the token can lose its peg to the dollar so it's no longer equivalent to the one dollar or the one euro that it says it is. And why is that an issue? If a stablecoin loses its peg to the dollar, that could cause a run on the stablecoins as people rush to redeem their cash for the token. You've essentially given the stablecoin operator$1 in exchange for one of its stablecoins.

13:02If that's not the same anymore, you want to get your dollars out as quickly as possible. That could trigger a fire sale of treasuries as the stablecoin issuer would have to sell some of its treasuries to get the cash to pay people back. And that could affect the whole treasury market. Now, we saw a brief glimpse of that in March 2023 when Silicon Valley Bank collapsed and Circle's stablecoin briefly fell below the$1 peg that it's meant to always keep. That happened because Circle said that about 8 % of its reserves were held at the collapsing bank. So everyone was worried about whether they would be able to get their cash out.

13:38While it illustrated the risks that stablecoins can pose, it was very brief because Circle was quick to reassure everyone that it did have all of the cash that it said it did. And the issue was with Silicon Valley Bank itself, and it didn't affect Circle's reserves.

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14:34So you've explained some of these possible risks that banks are arguing could happen if this so-called interest loophole is not closed. But how realistic are these concerns? I mean, couldn't some argue that these banks are just fighting this because they don't want to deal with competition from these new crypto companies? Yeah, exactly. That is the argument that the crypto companies make. They say the banks are not modern enough, that they are worried about competition, and they just need to create better products and compete. But at the same time, there are regulators and lawmakers across the world who are concerned about the growth and the entrenchment of stablecoins in particular in the financial system.

15:18There were some economists from the European Central Bank recently who wrote about a run on stablecoins, which could affect the functioning of U.S. treasury markets, for example. and some U.S. in particular Democrat lawmakers have also voiced concerns. So it's not just about what the banks are saying. For example, last year, U.S. Senator Elizabeth Warren raised her concerns. The Genius Act lacks the basic safeguards necessary to ensure that stablecoins don't blow up our entire financial system.

15:51So, Niku, let's talk more about how the big banks are pushing back on this legislation that was passed last year, the Genius Act. What actual steps are they taking to change things? Yes, so the Genius Act, as we said, was passed in July of last year. And the next big piece of legislation to come out of the U.S. is called the Clarity Act. And this is a much wider crypto market structure bill that's currently being debated in the U.S. As that's being debated, bank lobbyists are trying to use those debates to close this interest loophole. So the bank and crypto executives met in early February to try and reach a compromise on this interest point, which is really stalling a lot of the effort to move the rest of the Clarity Act forward.

16:33And the bank lobbyists came forward with a document just clearly laying out that they absolutely don't want interest to be paid by the crypto companies. And this is really the point of contention that will be quite difficult to satisfy. They're spending a lot of money in Washington to close that interest loophole. But at the same time, so are the crypto companies. They have a huge influence now, too. Yeah. Tell me more about what the crypto companies are doing. Crypto companies are lobbying and they're lobbying hard. This is new money. Crypto money has really grown over the past few years compared to the decades of American bank lobbying and lobby groups.

17:11And even though it's new money, it's really, really showing its power in Washington, D.C. Crypto companies raised millions of dollars to spend on the previous US election and the upcoming midterm elections. And this month, President Donald Trump even posted on social media a long post about this exact fight between banks and crypto companies over stablecoin interest. He said that the banks should not be trying to undercut the Genius Act and they need to make a good deal with the crypto industry because that's what's in the best interest of the American people. I mean, for the crypto industry, it can't really get much better than the president coming out on your side of a debate.

17:47So looking ahead as to what happens next here, looking at both sides here, the banks and crypto, what would each side say would be a win for them? For the banks, it's clear it would be a ban on the ability of crypto companies to pay interest on stable coins. And for the crypto companies, winning would be digging their heels in and maintaining what the rules say at the moment, which is that Coinbase and the like can pay interest to users and holders of stable coins. So what do you see happening next here as this continues to play out? It's a tough one because the compromise is difficult when it's a hard yes or a hard no on either side.

18:27There's been various ways of compromises that have been floated. For example, having potential ways in which you're using your stablecoin where you could be allowed to get rewards. But even on that, the banks want a narrow definition of what activities would be allowed. And the crypto companies obviously want a broader definition. Other compromises being touted include changing banks' capital requirements to let them be able to provide more loans and therefore not be so worried about deposit flight. But that is a pretty out there idea and I think it'd be very difficult to get past. What does this tell you about the wider adoption by Wall Street of stablecoins and crypto?

19:05It tells us that the old, long-standing money of American banks and lobbyists really want to continue having the power that they have over traditional finance, payment systems, and money. They're not against stablecoins as a concept. Many of them are exploring creating their own, but they want it to be on their terms, on rules which they like and which favor them, and which they think won't pose such a threat to the broader financial system. For crypto companies, it really shows us how powerful crypto has become in the US, especially as a lobbying force. Like I said earlier, the president of the US publicly voicing support for the crypto companies on this argument is a huge boost for them.

19:42It's also worth remembering that Trump's sons help run a company that also runs its own stablecoin. Overall, it just really shows the power that crypto companies now have in DC. Well, Niku, thanks for coming on the show. Thank you so much.

20:02Behind the Money is hosted by me, Michela Tindera. This episode was produced by me and Safiya Ahmed. Fact-checking by Simon Greaves. Sound design and mixing by Sam Giavinko. Original music is by Hannes Brown. Special thanks to Nisha Patel and Dan Stewart. Topher Forges is our executive producer. Cheryl Brumley is the FT's global head of audio. Thanks for listening. See you next week.

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