Big Banks vs. Big Crypto

In January, the CEO of Coinbase, Brian Armstrong, went to Davos, the famous conference

in Switzerland, where big wigs, shmuz, 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 Diamond walked over and interrupted and he said, you are full of sh** 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 JP Morgan 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.

How did Brian Armstrong respond?

We're told Brian Armstrong sort of kept his cool, largely.

That's our colleague, arm with Ram Kumar, he covers tech and regulation.

He says that the Jamie Diamond 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 and that will have a massive impact on the financial system of the future.

Welcome to the journal, our show about money, business, and power.

I'm Ryan Knutson, it's Tuesday, March 17th.

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

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The tension between banks and crypto comes down to regulation.

Specifically, regulation about a reward that crypto companies like to offer their customers.

A reward that to banks looks a lot like paying interest on savings accounts.

For banks, paying interest is a core part of their business model.

You give a bank your savings, it pays you a little interest, and then the bank loans

your money out to other people at a higher interest rate.

Everybody wins.

You earn some cash, the bank makes the money, and someone gets a loan.

In the past decade, crypto companies have started doing something similar with stablecoins,

which are pegged to real-world currencies like US dollars.

Companies that offered stablecoins started paying interest-like rewards to people who bought

them.

And in 2018, Coinbase, the largest US-based crypto company, started doing that too.

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 to translate to about three to four percent a year.

Coinbase 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.

They began offering trading and other types of cryptocurrencies.

They've begun offering payments.

They've also started letting people trade stocks.

So their idea is really to become the super app that you can do any type of financial transaction

essentially.

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 stable coin accounts, crypto companies can offer a lot more, even without

lending money out the way banks do.

Coinbase and crypto exchanges are saying we want to be offering three to four percent

and some 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.

The stable coin market is pretty competitive.

Everyone is competing to keep consumers on their platform and trading their stable coins.

Like yield payments of three to four percent are seen as a good way to do that and a good

way to incentivize consumers again to stay.

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, we're told it could be worth billions of dollars to Coinbase's bottom

wide over many years.

Rather than making money by lending out deposits like banks do, Coinbase makes money through

the rewards program with Circle by investing the US dollars that underpin the stable coin

into short-term US 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 tracking accounts which offer pretty poultry returns

about 0.1 percent 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 they do and those regulations

are why the tracking account yield 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 and as part of that, it should be able to give them a little sweetener,

a little incentive and if banks and others don't like that, they should do the same thing

or try to compete more.

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 and 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.

The Trump family even launched World Liberty Financial, a cryptocurrency company that offers

its own stablecoin.

And with a crypto-friendly president in office, the crypto industry started pushing for regulations

that it hoped would help solidify and expand crypto's foothold in the financial industry.

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 helps set standards for stablecoins that the industry had been desperate for.

It was the nation's first law putifying standards for crypto, so 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 avoid that.

But the Genius Act had a bit of a loophole.

Well, 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.

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After the genius act was signed into law, Congress started talking about passing another

bill, a more comprehensive one that would establish a framework for how the whole crypto

industry would be regulated.

And 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 what, how

to regulate the space.

This is XYZ what we have to do as a crypto firm and this is what the regulators oversee

and this is how the process works.

The 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 awards was becoming a really big sticking point.

The banks started making an issue of this loophole that allowed Coinbase to continue offering

those interests 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 yield.

So banks sort of realized that they need to essentially start a big fight over it.

Why are banks upset about this?

And so what?

There's a new competitor that's offering higher interests 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'll end and who they'll end 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.

But essentially that you can't do both.

And so basically they're saying they don't have to follow the analogous rules that banks

or other investment firms do when they offer those products.

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, 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.

And that's why it's had such a big impact in the Senate.

So you have senators like Tom Tillis, North Carolina, Mike Brown, South Dakota, Katie Brit,

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.

They 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 capital meeting with senators that day.

And 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 his him and his family, right?

And they want to come in and say that Americans should not be able to actually earn more money

on their money. They're trying to protect their own profit margins.

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.

Basically, that it would go forward to the full Senate.

And there would be so much momentum to get it done.

And that he was worried it would become a runaway train.

And he wanted to sort of stop that in its tracks.

So Armstrong fired off a post on X saying we can't support this bill.

There are too many problems with it.

The rewards aspect is one aspect.

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 X 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 Diamond, the CEO of JP Morgan Chase,

and led to that confrontation with Armstrong and Davos.

After 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 tried 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 coin base. 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.

Versus the short-term importance of stable coins and profits from rewards to coin bases

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.

It 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 seeing a 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 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.

What 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,

gun, 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

it's sort of long-term staying power.

That's all for today, Tuesday, March 17th. The journal is a co-production of Spotify and the

Wall Street Journal, additional reporting that's said by Dylan Tokar and Gina Heave. If you like

the show and want to connect with us behind the scenes, follow me on Instagram at Ryan underscore

Knudsen. Thanks for listening. See you tomorrow.

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