Banks Lose the Yield Fight: Inside the CLARITY Act Stablecoin Battle | BPH EP 37

This legislation lets companies get yield um but doesn't let you get yield. So think about that for a minute. They still make money off of off of the treasuries they buy um when you buy a stable coin. So keep that keep that in mind. Like let let that sink in. All right. Uh back with another week of the Bitcoin Policy Hour. As Ken likes to say, the number one Bitcoin policy podcast in the world. And uh as usual, we've got uh we've got some clarity talk. We've got some uh we've got some geopolitics. Ken, you you wrote a great piece uh this past weekend that sounds like you uh have been working on for a bit and uh a couple more items to dig into. As usual, joined by Ken Egan, head of government affairs at the Bitcoin Policy Institute. Zach Shapiro, head of policy at the Bitcoin Policy Institute, and I'm Zach Cohen. All right, let's uh let's dig into it here. I think the the key point for folks listening in is that the Clarity Act, so again, the Market Structure legislation is really on the finish line uh hopefully. And the reason for that being that we're expecting a markup of the most recent version coming out of the Senate Banking Committee um tomorrow. So, we are recording today on Wednesday, May 13th. I suspect by the time this reaches uh you know public audience uh that markup will have already happened. So Ken and Zach tread carefully here. Um but I think there's two dimensions to really dig into here and and the first being the blockchain regulatory certainty um act angle and then the second being the stable coin yield question. So we'll we'll jump into those separately. I think, you know, we try to go in depth here and and give folks a sense of what the language in those uh specific sections actually says. Um and then, you know, what the implications of that are and and what the timeline might be. So, Zach, kick us off here. Um you put out a tweet earlier this week that was sort of interpreting the um you know, specific part of the BRCA that we were most interested in. Can you recap what that specific language was and your view on whether it's sort of net positive, net negative or neutral? >> Yeah. Um, so what we had discussed previously was um on this show rumors about an edit that would be made to the BRCA developer protection provisions of the Clarity Act. Uh Ken got what, you know, in hindsight appears to have been very good intel. um that this was a carveout specific to the uh substitute of section 1960 which is the criminal law uh involved in the Samar Walton and tornado cash cases. Uh and that the language would be you know familiar to anyone who heard uh Todd Blanch's uh speech in uh Vegas. Um and what we had discussed is uh Todd Blanch had used the words uh intent and knowledge as sort of carve outs if you intend you know to help criminals or know you're helping criminals uh that you would still be held criminally responsible. Um, and the what we're waiting to hear is well, is it intent or knowledge? Because there's a world of difference between these two terms. And intending to help criminals is what is, you know, normally charged as money laundering, right? It's illegal to do something with the intent to help someone commit a crime. Whereas knowledge would have been way too broad a draget. Um, you know, just like Apple computers knows people use MacBooks to uh commit crimes. Um, or you know, Microsoft knows that Excel uh is used to commit crimes. uh and they're not responsible. It shouldn't be the developers of non-custodial are responsible or non-custodial software are responsible for um the fact that they know that people might use their uh tools for criminal ends. Um the language we got uh is I I think pretty good. Um you know, it's not exactly what I would have drafted, but that's that's not the bar for compromise getting through the Senate. Um and it the answer we got is it uses both. uh it is it's conjunctive. It is you need intent and knowledge. So if we read the specific language uh it is styled as a clarification. So it's not changing the law. But the the BRCA will not modify the application of this uh criminal statute 1960 B1C uh involved in in Turk samurai uh to any person which they define as their ter initial person. So, a person that acts with one the specific intent to transfer on behalf of another person funds that are known by that person to be either derived from a criminal offense or intended to be used to promote uh criminal or unlawful activity. Um, I think the reasoning for this language, the derived from a criminal offense is meant uh to go after people who are involved in in helping people launder money and the for criminal activity. I think this is um a lot of this came from sort of sexual exploitation and concerns about back page and sort of where uh you know people are building apps to help uh promote that activity. Um I think this is pretty good. I mean there I read this to to create two levels of protection that would make it very hard to bring cases like uh samurai wall and tornado cash going forward. Um the first is specific intent. Um so you need a specific intent to transfer funds on another person that are derived from a that you know are derived from a criminal offense or intended to be used. Um that's different than just knowledge that your tool will be used criminal funds. So, if you are a software developer and you're publishing a non-custodial privacy tool, um you might know that criminals might use it, but as long as your specific intent is not to uh transfer criminal funds, I don't read you as being captured by this carveout. And so, the rest of the BRCA should apply. And the fact that your tool is non-custodial uh should make it such that you can't be prosecuted under section 1960, which is great. Um the other like maybe protection here is that you need the specific intent to transfer on behalf of other people uh funds of criminal uh origin. Now they don't define the word transfer. That's what I would have done differently here. But um my view is contrary to um the ruling in the tornado cash case. There's not a lot of case law on this that if you are publishing a or hosting a non-custodial tool, you're not transferring anything, right? So, how could you intend to transfer if all of you're doing is is publishing code? Um, and this does not change the law, right? It's it's a clarification. It doesn't change the law. Uh, such that we are accepting the Southern District of New York's like very bizarre definition of transfer or transmit. Uh, that would include things like heat through a frying pan and data through a USB cable. Uh I I still think there's a strong argument that uh the word transfer here implies that you have custody in order to transfer something and that this clarification doesn't change that. And so I think that defense is is still left open. Um along with the specific intent uh now there is some chatter on Twitter about could this language be twisted by prosecutors and misused and um the answer to that is yes. Um right uh and could moneyaundering prosecutions be misused to go after privacy developers? uh perhaps um but the BRCA was not realistically going to change that um right this is definitely a step in the right direction this is better than nothing and importantly by adding this specific intent requirement I think it just like it's very hard to prove specific intent or men's rehea right what's in someone's mind they they wanted to do this it was the reason they did it um and you know good proof of that is that in both the Samurai wallet and tornado cash cases and the actual prosecutions the government did not prevail bail in either case on the moneyaundering charge which required specific intent. In the samurai wallet case, the government agreed to drop that charge even though it was the more serious charge with a harsher penalty um because presumably it would have been harder to prove at trial, notwithstanding some, you know, not great statements that the defense made uh that they intended to launder uh criminal funds. And similarly in the uh tornado cash case, although the government did bring the uh moneyaundering account that had a a specific intent requirement to trial, uh the government lost on that. The jury did not find specific intent by Roman Storm to help the North Koreans. That wasn't why he set up tornado cash. He did know at some point, of course, everyone knew that the North Koreans were using it because it was a huge amount of money after the Axi Infinity attack, but that's different than the intent to help them. Um, so I think that this change doesn't really meaningfully undermine anything, right? Like the government could always charge moneyaundering if they found specific intent. This means you can also charge money transmission if you have specific intent. Um, but like I think this to me leaves plenty of room if you are a software developer to create a non-custodial tool in including a privacy tool. And as long as you're not out there saying stupid stuff like I mean to you know you know criminals of the world please come use my tool or you know as oftenimes people get in trouble here for doing like customer service for criminals right there. There can still be sting operations by the government where the FBI poses as a criminal you know this is how like Charlie Shm got in trouble. Um someone was you know can you help me offboard funds from the Silk Road, right? People can still get in trouble for that. um just developing and publishing and hosting the software uh under even you know under the BRCA even with this carveout uh shouldn't implicate the criminal law which is great. Um, I want to quickly bring up a a tweet from Peter Van Vulcanberg at Coin Center and Zach, I think he, you know, you guys are are aligned in this. Um, but I think he brings up an interesting point that that I think you share, but I want to hear you kind of um, you know, talk about for a bit, which is the idea that like, you know, however this particular provision or law like lands, it should still leave like prosecutors the ability to go after bad actors, right? And I think that's like the the line that we're trying to tote here of, you know, hey, we need like sufficient uh legal protections where, you know, law enforcement feels like they can um you know, track down criminals and and prosecute them. At the same time, we want to like we want to get the right people and and Ken, I know you had some thoughts on this as well and you wrote a great tweet that um I think I I maybe was the first one to like, so I'll take credit for that. And so I'll let you uh I'll let you weigh in after >> somebody's listening. I'm not just going into the into the void. That's good. >> Um, so I'll let Zach start off here, but but I I am curious about this kind of tension as we're thinking about the BRCA and and probably thinking about, you know, BPI's like broader priorities here. Um, you know, how do we kind of get this right? And you know to what extent does like BPI um you know not not necessarily like cater towards the full like anarcho you know vision of the world um but also sort of protect like the key um freedoms. >> Uh I mean the ch the freedom related challenges here are the chilling effect. I I just don't think that that's intention in like look Bitcoin is never going to be happy with anything. Uh that's just how it goes. Um, and there are a lot of people who misunderstand this and there are people who are sort of twisting this into something that it isn't. But, but there just isn't a huge tension here. Um, this is the best we're realistically going to get. Uh, I think the domain on which we could have reasonably gone further that would have made me happy even though it's not politically feasible. Uh, is to be more specific about what we mean by the word transmit or transfer. I think that's incredibly important from like a you know drawing this this line that sets out the civil liberties of being able to to publish and run non-custodial code. Um >> I think like the the question here is really like you know like to what extent um is like let me think about how to phrase this like a little bit more carefully but um right like I think a lot of the complaints about BPI and again I know we're talking about uh you know the Twitter verse here but but surely some of those people are listening to this podcast like you know what's the reason and you can talk about sort of political feasib ility here in your answer because I think that's probably the the pragmatic approach. But like you know why is it that like BPI has to sort of like answer to law enforcement in our policy positions? I mean, I I we don't have to answer for law enforcement in our policy positions, but like I don't like we also don't need to take every farthest out there position in our capitalism, right? So, I guess the distinction I was trying to draw before like what is the line that like BPI cares about here? We care about civil liberties and protecting the Bitcoin network. And the line that like we care about that we want to go as far as possible for civil liberties is um about like transmission and like carving out transmission from the bank secrecy act with non-custodial tools. Like that's incredibly important and I think we are like maximalists on that. Like we want to go all the way and and like the strongest possible version of that proposition. Um, the other dimension on which this is being argued and the complaints on Twitter are like, you know, if you specifically intend to help criminals, isn't that thought crime? Shouldn't money laundering not be a real thing? Right? Like, how could you ever trust the government? And like my first reaction is like that's not what the BRCA is about. The BRCA is about line drawing between what what does the Bank Secrecy Act cover and what doesn't and not is moneyaundering a legitimate criminal offense? And second, like I have lots to say about, you know, prosecutorial overreach, but I don't know, like moneyaundering is is it's a bad thing. Like I I just don't think that that's like terribly controversial. And I don't think that's where we are. And I don't think it's answering to law enforcement or bootlicking. Like there are people that do really awful things out there. And if you know your job is to take envelopes of cash like from the cartel or you know from uh you know horrible online child abuse markets and intentionally like launder that cash through layers of correspondent banks or whatever and like that's your job. Well like you're a criminal like rightly so. That's a completely different thing than um you know is Apple responsible for the fact that you used a MacBook or is um you know Samurai wallet uh responsible for the fact that you know you you use that to you know move your funds privately like it really the intent is the crux of this and um just while like I think it is completely wrong that there are lots of parts of the government that are conflating this issue accidentally and then there are people like Elizabeth Warren that are conflating this issue on purpose. Uh I I don't think that it does us any favors for members of the you know Bitcoin or or like you know crypto anarchist community to conflate this issue on our side and say oh there's no difference between like actual money laundering and the developer protections we're looking for in the PRCA like no no like our whole thing is there is a difference the difference is the the whole bit that we're arguing for. Yeah, >> that's not being pro law enforcement or pro- freedom. I mean, I suppose it is like we view it as as about being pro freedom, but it's it's like that's our position is that freedom depends on this line being clear, not being like cops or robbers. Like that's the wrong this what I'm trying to say. That's the wrong axis on which to think about this altogether. >> Mhm. Yeah. Well said. Um all right, Ken, you flagged a a I guess it was a tweet or a comment um from some law enforcement agency. I'm I'm I can't find the specifics right now, but can you walk us through that? >> Yeah, and just to just to double tap what what Zach said, um either we participate in the process or we leave it to Elizabeth Warren of the world. I know everybody will say no, Bitcoin doesn't need governments. Bitcoin is resistance money and all these things are true, but we all live in under some kind of government. And I would rather having been in places where people have to test the resistance money theory. I do not want to live in a place where I have to test the resistance money theory. Yeah, I know Bitcoin will work, but I'd rather not. I'd rather spend time doing this than have to worry about um you know, using Bitcoin um to survive under under duress. I'd rather not do that. Yeah. So, and then and just to the um it's it's your question. Yeah. So, it was the um the National um NFL um National Federation of Police Officers. Um it's a well-known uh police association, well respected. Um and they are among the groups that put out letters um I think misconstruing like just misunderstanding um what BRCA actually does. So, a few weeks ago, the National Fraternal Order of Police, a really wellrespected law enforcement organization, published a letter um expressing opposition to what is what is essentially BRCA um noting among other things that it would restrict law enforcement's ability to trace and track digital assets. Of course, nothing in the bill anywhere in the bill, much less BRCA, mentions anything about tracing and tracking. Um I know a lot of Bitcoiners don't like that happens, but it does happen. Law enforcement does it. Um but nothing in the bill mis nothing in the bill prevents that. So it completely misconrudes which leads me to believe that a lot of and we'll talk about what's going on in DC right now but a lot of the law enforcement organizations are being kind of brought along uh by prosecutors and other um and other um actors. Um I don't know how often you know a county police officer uh deals with anything crypto related or digital asset related. I don't think they do. Um, so I I think there's just a lack of understanding and I think you know that's that that happens a lot right in Washington like different groups will reach out and say hey you know generally speaking allied groups where this is important to us. Would you write a letter in support? My gut tells me that that's what happened with some of these law enforcement groups. Um, but the prosecutors, for example, no, I think, and I think Zach hit it on the head um earlier when he mentioned, you know, the the fact that prosecutors were unable to convict either in Samurai or Tranto Cashache on the more serious charges that they end up getting them on lesser charges. That tells you why pro the pro the National Prosecutor Associations hate this because they want maximum flexibility to prosecute crimes. Um, sometimes that's not necessarily bad. Um, but it is bad when it when it infringes on constitutional freedoms. So, I think this I think there's a little bit of that going on. There has been it's been a really interesting couple of days in Washington on the Hill. Um, a lot of this and I think that Senator Scott, chairman of the Senate Banking, uh, the White House, Patrick Whit, deserve a lot of credit because a lot of this was going on behind the scenes, but we're seeing in we're seeing full tilt the level of opposition on the hill today. Um there's this very interesting coalition of American bankers, the AFL CIO and and some law enforcement unions to be fair. U really hitting the halls of the House really hard trying to jump opposition to this bill. And of course there's a lot there's other reasons for Democrats to be unhappy with this bill. You know, they have concerns over ethics, right? Anything to sort of any anything to sort of, you know, um to oppose President Trump. Um ethics issues. Um they're sort of citing spirious national security grounds. There's a lot going on the hill and it's this really interesting sort of collection of actors. I mean who would have thought you'd see like law enforcement unions and bankers all doing the same thing on the hill. Um strange bed fellows. Um so I think then but I think that sort of the core of this is um first of all we talked about this before the bankers got their act together. um they they you know they they threw um they threw sort of a stick in the spokes starting with yield discussions. Um but that that that just allowed everybody every other interest group that has sort of gripes with digital assets in general. Um that gave them time to regroup. It gave them a little bit of win in their sales and everybody's everybody who hates this bill is coming out of the woodwork. uh I think just today. So we'll we'll see language tomorrow I think in the Senate, but I I've heard from good good contacts there's been dozens and dozens of amendments proposed. Senator Warren apparently herself has put in dozens of amendments. Um Senator Cortez Masto um I think >> over 100 amendments. >> Yeah. I mean think about that. That that is like that that doesn't happen for a bill like this. That happens in like a budget bill or you know a defense bill. That is uncommon for a bill like this. This is this is this is a standalone bill, right? This is not one of those sort of big huge things that everybody has has gets a piece of. This is a bill. This is a standalone bill. Um and clearly the process is designed to slow it down. Um so we'll see. And then to back back to sort of um your original question about why BPI is doing this. U I again I want to reiterate um that you know we dealt we lived in a world where we had very hostile regulators. This is the first time this is the first between list this and clarity or the first time we've actually had any like digital asset focused legislation happening in Washington and yet uh the previous administration people were locked up uh companies were shut down chased overseas um banks that dealt with crypto were harassed shut down so let's not remember let's let's sort of like think back to what can happen if we don't have fair rule of regulation and again I think some people don't like this but this process requires there's always compromises when you're you know dealing with legis legislation. Um, and again, I think it based on the sort of the ferocity of the opposition we're seeing this week. I got to give Tim Scott credit for holding the line and and putting out language that like he probably knew was going to create this reaction, but he did it. Um, so clearly that that that if it makes Bitcoin feel better, that clearly sort of conveys some level of conviction because he could have made a couple of deals and it's very it's not easy. ations that when you want to move big institutional players like to on a bill, it's a lot you have the government has a lot more leverage to do that than than just sort of like you know plebs. Um and there's no way that like you know the the Senate majority majority Republicans on Senate Banking didn't know this was going to happen and they put it out anyway. So I I got to give, you know, the Tim Scots, the Cynthia Lumis', the Bernie Marenos credit um for for holding the line on this because it would have been very easy to give, you know, a couple more yards um to Elizabeth Warren. They still would have opposed the bill, but you you'd be fighting for much a much less advantageous position. So yeah. >> Yeah, these amendments are really interesting. I I was just looking at this tweet from the DeFi education fund and you know there there's amendments in here, one of which from Senator Reid uh purports to eliminate the BRCA from clarity altogether. Um and so for folks who are listening like this is this is really crunch time. Um you know we'll have this markup tomorrow and and get a better sense of what was actually included. Um, but you know, to also go back to this sort of law enforcement angle, like we one of the the primary oppositions seems to be from Senator Cortez Masto, uh, who has a law enforcement background, right? And so, as we're thinking about like what language goes in here, it's like, hey, you know, Senator Cortez Masto is, you know, probably has relationships with folks, um, you know, still in law enforcement who are saying these are the things we want to see in this bill. These are the things to, you know, these are the gotchas or the the things to watch out for. And so like as we're thinking about what language goes in there, it's you know it's always a thought process of um you know how is this going to be interpreted by law enforcement? Is this suffic is this sufficient for them to feel like they you know can still do what they think is right? Um and obviously >> she's a foreign prosecutor, right? So she is to work in the interest of prosecutors and that's not necessarily that's not bad. Um, again, in this particular case, back to what exact said, you know, prosecutors tried to convict um, samurai and tornado cashache defendants on very serious charges that would have put them in jail for a long time and they couldn't do it. Um, they relying on sort of the the vagaries of the things that we're debating under 19 under BRCA right now. Um this is this and this is why it's important you know especially with with the way technology work you can't leave gray areas that allow people to be prosecuted just at whim because you know you know the the old saying that you anybody's a felon just give like just give just give me time. Um that's literally what you're doing um when you leave these vagaries that you could you could literally um you say let's let's let's imagine you have another three or four terms of pro you know pro digital asset uh administrations in Washington speculating but that could change literally without without legislation that could change you know with one election and all of a sudden what you what was legal before or was permitted is now illegal and you're finding yourself prosecuted. you know, the gray areas in the law are a bad thing, especially when like people are acting in good faith and, you know, it's, you know, some people say, "Oh, it's only a couple years in jail, but nobody wants to go to jail." So, you know, the idea of like leaving these things vague and giving um giving prosecutors that kind of like uh freedom of action um is just not it's it's not frankly it's also it's not good governance. Like, you know, if you want people to have faith in their institutions, the institutions have to be clear in what is what is allowed, not allowed. >> Yeah. I mean to bring this back practically to like the Bitcoin network, right? Like we need people to build tools. We need people to build non-custodial tools. We need people to build privacy tools. Um you know, I have a law practice where people come to me a lot about, you know, I want to build this non-custodial tool that may or may not have privacy features. Like what advice can you give me? Right? They're they're not like one of the sort of small handful of lawyers that does this. And so I see a lot of it. And the difference between the advice I give before which is like look we think that the law is if it's non-custodial that the bank secrecy act doesn't apply and you don't need KYC AML but there's case law that pushes very strongly in the other direction the Southern District of New York and so you better hope that like a prosecutor doesn't wake up on the wrong side of the bed versus the advice I could give postclarity which is like don't stay don't say stupid on Twitter right like just make sure you're not having any statements in your pitch decks or your social media or whatever that look like you are intending to help people commit crimes, but otherwise you're not going to be punished for the fact of what your tool does. Um, one of those has a much bigger chilling effect on people's willingness to start businesses than the other, right? Like it is a manageable instruction to say be very careful about what you say if you're building a privacy tool so that your intent can't be misconstrued the wrong way. um versus well, you know, uh here's my view of the law. You know, STDMY is a different view and uh hope hopefully uh judges will figure this out. >> Mhm. And I don't know, I mean, Z maybe Zach would know. I don't know how many cases are brought every year against unlicensed bunny service money service transmitters like and just just standalones, right? I'm sure it's tacked on to a lot of cases, but how many people are just locked up for doing that? >> No, it's not a lot. And and the actual speech that I give actual people is like look you know in the cases where there are standalone criminal prosecutions almost always like there is actual moneyaundering happening and the company knows about it but that's kind of cold comfort to someone who's just trying to do a startup and like if you if you get unlucky you go to prison. Um and so you actually don't need that many cases for this to have a very strong chilling effect which is why having you know clarity is so important. And also remember like not long ago the head of finen there's a lot of talk about you know KYC AML and why the bank secret shack is very important you know the head of head of finen testified in front of congress was in the last six months and couldn't actually say how many convictions have resulted because of BSA reporting um you know and millions and millions of reports every year and that and that doesn't include then if you're cash transactions I think the number is like I think Anthony did some good work on this I think it's almost like 29 million reports every year um of either um suspicious transaction reports that's you know a bank, literally a bank teller just doesn't like something about you and reports you or you know you bring obviously more than $10,000 in um in cash um and then Fininsen can't can't actually answer the question this massive surveillance operation how many prosecutions has it led to if they don't know it's problematic. >> Yeah. Um okay so just to wrap up the conversation here in terms of those amendments um will we know tomorrow what that final bill looks like? Do the amendments sort of extend into the process here or is this like the moment is now? >> Tomorrow's markup. So tomorrow is when the committee gets together and starts going through these things. So I think by close of business tomorrow um I mean a lot of these amendments are just statements, right? I mean it's sometimes majority vote. No, no, no, no, no. Um so they don't require a lot of time. Um but I think tomorrow we'll have we'll have a good sense of what this is going to look like. >> Cool. Hence again, hence why hence why you've got this like flurry of activity on Capitol Hill today. >> Yeah. Um okay. Well, so we'll report back on that next week. Um but probably a reasonably good sign that that what's already in there is is reasonable and and um practical and hopefully that doesn't change. >> Okay. Um we're looking here at section 404 of the Clarity Act. um which again is the stable coin yield question and we were speculating a little bit last week. We didn't have the the actual draft text in front of us and now we do. Um I think my my first sort of like flag here as I was going through it was this notion of economically or functionally equivalent. Um and this is something that we discussed last week, Zach, and and you were talking about hey like when this actually reaches the courts, which it inevitably will in some way. Um the question is going to be you know how do judges interpret this? And it seems like this economically or functionally equivalent language has actually been removed from the bill which seems to sort of sidestep one of the major kind of questions that's been outstanding. Um >> I mean even even more than that it deeply stacks the deck uh in one side's favor here. So, um, the Genius Act, which is the actual stable coin legislation, uh, bans yield on stable coins, but it bans it from a stable coin issuer. Um, the, you know, the loophole here is that a stable coin issuer like Circle, uh, can enter into a partnership with a third party, uh, like Coinbase where Coinbase pays out the yield on Circle stable coins, which, uh, encourages people to hold USDC on Coinbase and is good for both companies. And um banks see that as uh a loophole uh because people earn more on their USDC on Coinbase than they do in uh normal depository accounts. And that's what banks are mad at. And specifically, they're mad at Coinbase for paying interest on USDC. Um if you look at the language here, there's actually not much uh that's left up to judicial interpretation. I would have thought this would be um somewhat more like the BRCA stuff we're talking about where there might be some room for like judicial wrangling. Um it seems like, you know, once again, Coinbase made out better than the than the privacy devs in the negotiations here. But if you read the language, um there's a pretty stark contrast between uh subsection B1 that says a digital asset service provider, which means someone like Coinbase, um may not pay any form of interest solely in connection with holding a payment stable coin. Okay, so that seems like what the banks are asking for uh is a prohibition on third parties that are regulated uh specifically digital asset service providers like Coinbase. Um they're not allowed to pay interest. However, uh subsection B2, permissible activities, the prohibition under B1 shall not apply with respect to activity based reward or incentive including any consideration, reward or benefit in connection with. So just to parse that language, the first half of the sentence seems like what we're expecting. So activity based reward or incentive and and I would have thought that like there would be a lot of sort of um lawyerly wrangling about what's activity based and what's not and where is the line. However, the second half of the sentence says including any consideration, reward or benefit in connection with and it's a list of things that includes B the use of a wallet, account, platform, application, protocol or network. Um, so I would read that to very plainly say Coinbase can keep doing exactly what it's doing, right? That seems like an exception that swallows the rule, at least the rule that the banks care about. So, um, either the banks have capitulated because like they're they like this is not a close call. This, you know, this is a a huge give to the, you know, Coinbases of the world. Um, or this language is not going to survive in a square form. Yeah, there was uh some reporting from Eleanor at um Crypto in America that the banks had, you know, they'd written this letter and that they were all over DC. Um can I'm curious if you've seen it if you've seen the banking lobby also show up, you know, on Capitol Hill. Um and if you think Zach is right that this might not actually survive intact. >> They're there in force um in force and I think I think frankly they they overplay their hand. I think they had some good momentum right after Brian Armstrong first pulled out of negotiations back in January. They were in a very good position to get a reasonable negotiated deal and they went and they went maximalist. I I think um I think fundamentally they they're trying to like actually the water so much that clarity just doesn't pass. But they had a they had a chance few months ago to like you know make it make it make a decent deal. Um that would have made it look more like credit card rewards or something. Um but they would play their hand and um I think that this is this is the result. Um I said this I had a you know the staffer ask I asked a staffer you know she had to spend 10,000 of her own dollars on a bet. Would you bet yes or no? Clarity passes and her her bet was yeah I'd say yes but I wouldn't you know I wouldn't sleep I wouldn't sleep well I wouldn't sleep well on it. Um so we'll see. Um but there's a I think people need to realize a couple things about this. And first of all, this bans like Circle paying or Coinbase paying you yield doesn't ban Coinbase from getting yield from Circle. Um, so people need need to take that on board, right? This this legislation lets companies get yield um but doesn't let you get yield. So think about that for a minute. If you're asking like the motivation of the banking lobby, um, you know, the companies still get yield. They still get they still make money off of off of the treasuries they buy um when you buy a stable coin. So keep that keep that in mind. Like let let that sink in. This has nothing to do with like it's about you. It's about people like getting yield. It's not about companies getting yield. And secondly, I've said this before many times like I know there's big talk especially even frankly with some Republicans about threats to community banks. I think JB Morgan has bought 250 banks since the mid 80s. Small banks. So keep that in mind everybody. The biggest threat to small banks or community banks are big banks. >> Um Zach I want to look back at a specific section here. or maybe you can pull it up on your end too, which is at the very end section F.2, um, which is the rules of construction. It says, quote, "A permitted payment stable coin issuer shall not be deemed to pay interest or yield with respect to a payment stable coin solely because a third party independently offers consideration, rewards, or incentives with respect to that payment stable coin unless the permitted payment stable coin issuer directs the program." I mean, this like feels like very explicit. like I I guess I'm almost like surprised or quite surprised. >> The point of that language is um sort of protecting Coinbase and Circle's flank, right? Because all right, like the banking lobby is going to want to whatever version of this passes even if this reads as like okay clearly I I read this as clearly Coinbase can just keep doing what it's doing. But um even if that wasn't or let's say that was clear, one smart thing that like the banking lobby's lawyers could do uh is to say well okay um Coinbase is allowed to pay yield but you know we looked at coin like circles S1 when they went public and like they are paying more than half of their revenue to Coinbase. This is clearly a very deep partnership and like even though nominally this is being presented as Coinbase paying yield uh for people who want to keep stable coins in the platform, it's just USDC. This is clearly meant to create demand for USDC and the rate is set by Circle. Um, and so we are going to sue Coinbase and Circle on the theory that under the Genius Act, Circle is violating the Genius Act by backdoor paying yield through Coinbase because it's Circle that's calling the shots and not Coinbase. This forecloses that. So, this is just extra protection for Coinbase. This is like a very clean win, I think, for Coinbase's specific interests here. Um, >> and do you think this partnership sort of like defeats the purpose of the Genius Act, right? Like if it's the case that Circle is like very closely tied to Coinbase's bottom line, um, >> I think it does, but um, that purpose of the Genius Act, I think, is illegitimate. It's just protectionism by the banks. >> Mhm. Like if the killer app of st stable coins ends up being that they are a better place to park your dollars than a bank account because they're more generous with their depositors. Shame on the banking lobby and they should be out innovated. >> Sure. Okay. Um Ken, last question here and then we'll we'll get to your Iran conversation. Um it it seems like like the big win here for the banks is this like um two-year FDI FDIC Fed OC study. Um what what's the deal with studies in Washington DC? Like why is everyone so interested in studies and and it this just feels like a complete nothing burger, right? >> Yeah. Studies are always a give. It's what Congress will give to favorite industries. It can't if you can't get something in a bill, you study it. Uh because that lets the issue survive. Um it lets you get through it's always and it's never six months, right? It get lets you get through an election cycle. Um it lets the dynamics in Congress change while study being conducted and in the meantime, you know, you fight for more favorable Congress. So studies are or studies are a way to keep like it's that that's the best metaphor is like, you know, put it on put put the pot on low boil. um let it let it you know let it let it simmer and then you know and then you know prepare to prepare to um to tackle your issue whatever that issue is again um when you when you when you have the chance of a more favorable Congress. So yeah, it doesn't mean anything. It's it's just a way for like it just it just keeps oxygen flowing to the issue. >> Um that's all it does. >> Cool. All right. Um sounds like we'll we'll know quite a bit more next week. I think we learned a lot this week. Um really interesting draft and um more more to come next week. Shifting gears a bit, Ken, you've been writing quite a bit about this uh Iran situation and um certainly from from an expert on the topic. So can you give us um I think you know from a personal level like the thing I'm most interested in having read this piece now is like your description of like kind of who the key players are. Um, you know, I'm thinking particularly about like the players in Iran. Um, because it's obviously a complicated situation. So, maybe we can start there. >> Sure. Um, like many countries in the Middle East, um, Iran is a multi-thnic society. Um, there are there are I think there's more than a dozen um, ethnic groups living in Iran with size with sizable presences. Um, but there there are some primary ones. There are Kurds, there are Azeris, Arabs. Um, and I messaged some others in in the piece. Um, so Iran is I think Iran is about 40% Persian, maybe maybe close to 50% Persian. Um, but again, so ethically diverse. Um and then and then I this this this sort of piece was was inspired I read an article um p uh published by the council of foreign relations a guy named Ed Hussein who's a middle eastern scholar there um talking about a what or what could be a determined US policy is to create a movement to make turn Iran into a federal to a to a federalized state a federation of different ethnic groups um any any any any reasons he has you know he has re good reasoning why he think that's the case I read that interesting piece um but then also So within the past week, President Trump made a comment about Iranians getting guns and they have guns and maybe they're getting more guns. Um, so you know, so first of all, again, people like joke about the deep state, so the Council of Foreign Relations, you whatever. I think there's they they have some good people that are running good stuff, but it certainly is an established Washington think tank that understands sort of policy moves in DC, certainly on foreign policy. So the fact that they put this out um is interesting. It means I mean it it shouldn't surprise anybody that people this have been kicked around as as an idea on the shelf. Um, but when the C when CFR is featuring this as a piece on their website, clearly there's something to it. And then President Trump essentially saying we're giving them guns, um, sort of lends sort of actual policy credibility to it. So it's not it maybe is less speculative than just a think piece by the by the Council of Foreign Relations. So you know, and I think I thought I thought Ed's piece was good. Um, I think it downplayed um a little bit the risks. I don't you know find me my my point being find me a country first of all this has worked in the past since the end of the cold war and a country that um you know survives in a federated model there's not many um certainly if that federation evolves out of a violent conflict which this federation theoretically would um it would it would result because of political pressure that that squeeze the regime and the way it's described possibly even you know result in squeezing Persians I don't necessarily I don't think it's in US interest for Iran to fragment like that. That's just my personal opinion. I don't I I don't think it I don't think the Gulf neighbors in the region would like to see Iran fragment like that. Fragmentation always leads to some kind of violence. Sometimes that violence is shortlived. Uh sometimes it drags on for a long time like Afghanistan, Iraq, Yugoslavia, um decades in some cases. Um, so and I think fundamentally, you know, President Trump, I think, un, you know, sort of inherently understands the risks of destroying um, you know, an authoritarian state and replacing it with a vacuum. Um, you know, we we literally just got out of Afghanistan. We're just getting out of Iraq. Hasn't worked and I don't think he wants to replay that. Um, the problem being though, of course, we've reached significant impass um, in the crisis. The Iranians are buying time. um they are, you know, the the proposal they they just sent this week was unacceptable to to to the United States. Um I think a lot will come out of President Trump's discussion with President Xi and China. Um China is obviously an important ally of Iran and I think Chinese pressure could move the situation. Um but and absent that um brought a stalemate um and you see there's been reports now of of the UAE and even Saudi Arabia launching attacks against Iran, Iran responding um you know so the seeds of a low-level sort of lingering conflict are there and that just doesn't work um in the world. There's there's no there's no stasis in these sorts of things. The front lines move um and things happen. Um, so I, you know, I decided to explore, um, without advocating for it because I I I'll be honest, I have some reservations about what it looks like, but I tried to I I explored, you know, what would it look like? What would a what would a reasonable way be if you wanted to to to to take that path of, you know, exploiting, you know, ethic grievances, what that would look like. Um, and you know, I worked that out. I, you know, essentially comes to making, you know, provinces outside of outside of the major cities ungovernable, forcing the regime to move resources there, which of course then weakens the regime's overall hold. Um, I I try I hope it highlights enough. I mean, that's it's a very dangerous policy. There's some dirtiness to getting involved in these sort of ethic things. Um, besides sort of the moral issues of doing that, you know, they haven't worked. Um, you know, Libya, um, you know, Mr. Benghazi um Iraq Sunnishia Syria I mean just all all and and all through and that's just the region and look at Africa and whatnot um you know it never turns out well and I you know I think it's I think we would be remiss to to just assume that somehow in Iran it would work out well as well. Um so you know I you know I it was a thought it's really a thought project like what would it look like? How would you do it? Um, and you know, you'd want to be very specific and deliberate and only target aspects of the regime that you know that are really the sort of the the pillars of power and that really includes IRGC that for example would would require renouncing any attacks on the artes, the regular Iranian military. Um, now again I highlight that's a that that for me is what a a best case scenario would look like should they choose this. Uh, I don't know that it's a good idea. Um, but I think there's ina absent I don't I don't think we're going to see a renewed air campaign. I don't I don't think it's going to happen. Um, Certainly as elections uh elections approach, we are not going to start a bombing a massive bombing campaign again. Um as we get through, you know, as as as midterms approach um that's also not going to do any favors for the affordability issue with the with with the price of oil. Um I think that the White House, if you think through it, could continue operation, you know, um um the, you know, the blockade and keep Iranian tankers bottled up while letting everything else that can get through get out. um and then increase pressure on the regime. Um there's a guy named Big Serge on on and this whole thing was inspired by a guy named Big Serge on uh Subnack wrote a great piece very interesting piece about his thought with the idea is to turn Iran into he called it trash trash canistan which is something to make the the country ungovernable for the regime. Um but again he also acknowledges that doing that creates you know every ethnic group is they don't exist in a vacuum right like Kurds border Iraq and they border Syria and they border Turkey. Um and there are issues there. Um the Azeris border Azaraijan right the Ahaz the Aazrabs sit on all the all you know a lot of Iran's energy resources and they are located in southern Iran near you know near the Arab neighbors in in the Gulf and in Iraq. So these things don't you know once you unccork I think I said this once you unccork the bott of violence like you don't know do not know where it's going to go and of course like ethnic violence is always the worst kind. So like just just of course intensity and you know and all the reasons why these things happen. So, you know, I I I thought through it in a way that was just if you're going to do it, this is what it would look like. But I have I have serious reservations about whether um it's a good idea and that it even that it would actually frankly be successful. I think it would be successful. Um but it I should say that it would lead to good outcomes. >> Yeah. I mean it it seems to me like the way that this piece is framed is like you know among the other options this is probably the best one and like it should be done with extreme caution and you know like very targeted in in what it's doing. Um, do you I guess you know the question to you is like do you think that that's like sufficient to justify you know putting guns in the hands of of these resistance groups or um you know however we refer to them. Um or is it like hey you know I'm going to like leave this to the decision makers and um you know we'll see how it goes. >> Yeah. Again, I wrote it because I think the people talking about it, again, the president said it. Um, so, you know, when the president says something like that, you should take him at his word. Um, and you know, you have the council of foreign relations putting out research on it. So, I I think it is I think it is on the shelf as an option. Um, so, you know, what does that option look like best best executed? Um, and so, yeah, that that's what I try to do. Again, I I think it's a it's because I I question a couple things. I think we are running up against patience. Um, President Trump is not gonna walk out of this with a loss. He's not going to do it. >> Um, and that but that when you when you start from that from that perspective, you always risk escalation. Always, right? I will not lose this fight, which means okay, I mean, well, either the enemy gets knocked out or you have to like, you know, go from fists to knives to bats to guns to knock him out. Um, and you the longer this goes on, um, the longer gasoline, you know, approaches, you Virginia, we're paying, you know, 460 a gallon. Um, you have an affordability crisis. All the things line up to the White House looking for what they would perceive to be a lowcost um a lowcost solution to this to accelerate the regime's decline. I think we're clearly clearly we're in regime change mode at this point. Um so they're looking for ways to accelerate that and this is and this is being bounced around because I've seen it again I'm not proved any other conversations. This is simply based on what I've seen um you know in media. Um, so I I thought through it and again I I think I'm pretty explicit like it's it's it's it's a very very very risky solution. Um, and it risks it risks doing damage both regionally also like you know do we want to is this necessarily is this a great precedent um to set again that we're going to get involved in a war and stoke ethic tensions when theoretically we're going for like you know the opposite. Mhm. Um, and you brought this up earlier, but you do mention uh Trump's meeting with Shei. Um, Zach, I want to bring you in here. So, Trump brings this like long list of tech leaders or or is, you know, going to um I'm curious like what what that signals to you. Um, I've heard, you know, people commenting on it, but I'm curious on your take. And, um, and then Ken, we'll we'll turn to you to to talk about kind of what that means for what you were talking about. But, Zach, I'm just curious on your reaction to that. >> Um, I mean, we're in a space race over AI. Uh, and the stakes are like world domination. Um, right. If one country gets to like real AGI first, uh, that's, you know, potentially decides the superpower race, right? Assuming that AI doesn't kill us all. And so, um, you know, the the tech of this all is like very important and, um, relevant. And I I think it's probably a good sign. I I'm not sure that like Trump is the right person to, you know, have all the angles on, uh, what this this AGI future might look like. And so, it might might be might be useful to have have some people there uh, to explain how it's it's all computer. >> Yeah. Ken, what was your reaction? I again I think I call it like the failins like this is I know that that that the the med the American media is really playing this down. It's just about trade. Um it's you know no very few you know the bar for success is very low. I don't think I don't think that's true. Um I think this is a really really important meeting for President Trump. I think it will set the tone for relationship with China certainly throughout the rest of his term. I don't think it is like, you know, and the fact that he's bringing like, you know, a plane load a plan worth, you know, $7 trillion in in in people with him shows you that he doesn't think this is just about like, you know, buy more soybeans and sell us buy more of our soybeans and and sell us more of your air. It's more than that. Um, so I think he's trying to he's trying to bring a united front to de demonstrate strength and prowess. Um, demonstrate that China still needs the United States um in a way that's important for their growth. I think he's willing to make a deal with him and I think they're willing to make a deal, but I think they're looking at different things. >> What's the deal? Like what what is the deal that all these people are relevant to? >> I Well, I think I I think China wants recognition of they I think they have certain issues. I think China wants recognition of peer status. I think they more or less got that from him, but they want that. Um I'm be really curious to see where if if Taiwan comes up. I don't I I can't imagine that Taiwan's not going to come up at all. and make up side discussions, but I just I just don't believe that Taiwan's not gonna not gonna come up. Um I think they are very I think I I think they're very upset about the Iran thing. I think they would like to see um some kind of resolution. I think China's really China actually prepared really well for this. I mean they've got I think they have you know we produce oil and but they have more reserves than we do. Um but they've also stopped exports of distillates. Um but their periphery is suffering under this war. Um and Iran is an important client state. I think they would like to see some kind of resolution that leaves the regime intact. Um, and I think they want access to our tech. I think they want the rhetoric on trade to stop. At the end of the day, they want, you know, they want >> what do we want? I And that this question, what what do I think the president wants or what do we want? I think we want I think we want China to stop dumping. I think we we want China to stop dumping. Um I think I think I think we want China to accept generally generally speaking accept the status quo. You know the world is as it is and we don't want to see you like being disruptive in parts of the parts of the world that are important to us certainly Latin America. Um we own Latin America for you know the DMO adoption and we don't want to see you messing with our interests there. Um, I think they would like to not see China continue to make territorial threats um against Japanese and Philippine um uh claimed islands. U I think the Americans I think Trump would like to see status quo and I think he wants the rare earth sped again. Um but I think generally speaking he wants return to the status quo but somehow that allows us to blunt what our Chinese advantages which are manufacturing. Um, we have a lot of gripes with the way China, you know, with with Chinese policy manufacturing and how, you know, how they dump how they how they they dump products all over the world. Um, Europeans have even more gripes about that. Um, that's not our problem. Um, but I think he essentially wants to return to status quo in a way that allows us to regroup and him to, you know, his agenda, domestic agenda, um, on manufacturing, all the things he's talked about, while at the same point limiting China's ambitions. Um, I think that that fundamentally is what it comes down to. Um and I think showing bringing again trillions of dollars in wealth and you know the biggest comp biggest you know uh companies in in in the world certainly in the American market but definitely in the world like you know actual you know companies that define where techn is going and and and finance and across the board bringing them is trying to show the Chinese that you know you're you're this is a feud this is a feudal fight. Um we have a lot we you know we we bring a lot to the table. um we are the leaders right now and you can either like accept that in in some kind of way in a status quo sort of way and benefit from that in a constructive way or you know you you gota take you got this is what you're taking on it's like a failance right like the failings can be offensive and defensive um this is it and um you know what you know what's your what's your counter offer so I I think it's it's a projection of strength but I I think that fundamentally they want the Chinese their mindset to return to some kind of status quo that allows a more gradual sort of implementation of the Trump the Trump the Trump economics agenda re you know rebuilding manufacturing um you know sort of rebuilding sort of supply chains I think he wants to be able to do that without being under pressure if that makes sense. >> Yep. Cool. All right. Well, uh we're at the hour maybe a little bit short. Um but it was a good rip. >> What we Well, you owe us something from last week. Oh god. >> Well, do you want the price to tank? >> No, I want to hear I want to hear what you think. >> Cuz if I if I come out super bullish, then it's just like we're going to dump. So if that's what you want, you know, I can give you that >> or we could wait till next week. >> Zach Cohen moves markets. >> Oh man. All right. Good rip. Um, we uh we'll see everyone next week for more Clarity Talk, which which seems like we're now the Clarity Podcast. Um, but uh definitely interesting stuff. So, we'll uh we'll keep covering it and see you guys next week. >> See you.