The future of U.S. digital asset market structure legislation is one gigantic question mark after the CEO of Coinbase (NASDAQ: COIN) digital asset exchange withdrew his support for the bill.
The U.S. crypto sector resembles an anthill kicked to pieces by some eight-year-old sadist after the Senate Banking Committee cancelled a scheduled Thursday markup session for its latest draft of the CLARITY Act. The cancellation followed a Wednesday afternoon tweet by Coinbase CEO Brian Armstrong that said his company would “rather have no bill than a bad bill” and thus it “unfortunately can’t support the bill as written.”
Armstrong claimed the draft had “too many issues” to support, citing “a defacto [sic] ban on tokenized equities”; certain “prohibitions” on decentralized finance (DeFi) activities; the “erosion” of the authority of the Commodity Futures Trading Commission (CFTC) and making it “subservient to” the Securities and Exchange Commission (SEC); and, of course, the plot by traditional banks to “kill rewards on stablecoins.”
We’ll address Armstrong’s points later on, but for the moment, we’ll focus on the fallout from the markup session’s cancellation. Committee chair Tim Scott (R-SC) issued a statement saying there would be “a brief pause before moving to markup,” adding that “leaders across the crypto industry, the financial sector, and my Democratic and Republican colleagues” remain “at the table working in good faith.”
Committee member Cynthia Lummis (R-WY) issued her own statement saying she was “deeply disappointed” by Armstrong’s declaration, which she said “proves [crypto operators] are just not ready” for the ‘regulatory clarity’ they claim to seek.
TD Cowen analyst Jaret Seiberg noted that Armstrong’s last-minute objections “include changes that Democrats secured in advance” of the markup session. Seiberg expressed doubt that “the bill could be improved in a way that satisfies Coinbase but preserves the bipartisanship needed for this to overcome a filibuster in the full Senate.”
Scott has yet to indicate when Banking might reschedule a markup. Armstrong suggested to CNBC that a new CLARITY draft would “hopefully get back into a markup in a few weeks.”
But Politico quoted Lummis saying it would “take a while to develop a plan on how to make another run at it. I’m not going to reach out to do it immediately. People need a chance to soak in what happened.”
Committee member Thom Tillis (R-NC) appeared to echo Lummis’s timelines, saying only that he remains “optimistic we’ll have a successful markup this quarter.”
Earlier this week, the Senate’s Agriculture Committee postponed the markup session of its own market structure bill until January 27, claiming more time was needed to negotiate unresolved issues. It’s unclear whether the Banking drama might push that session back or affect the Ag committee’s plan to issue a revised version of its bill on January 21.
Did crypto’s Lex Luthor overplay his hand?
Just before yanking his support, Armstrong appeared to issue a not-so-veiled threat to direct his company’s tens of millions of dollars in campaign funding against any politician he deemed insufficiently crypto-positive.
Armstrong tweeted that Coinbase’s astroturf group Stand with Crypto would be “scoring the Senate markup this week.” This scorecard would determine “which Senators stand for bank profits at the expense of the American people, and which stand for consumer rewards.”
Coinbase’s chief legal officer, Paul Grewal, was quick to support Armstrong’s warning, tweeting that Coinbase was “Keeping a list. Checking it twice. Gonna find out who’s naughty or nice.”
But Decrypt quoted a ‘Washington policy expert’ who called Armstrong’s last-minute withdrawal of support “farcically inept and entitled.” Said expert also rubbished Armstrong’s apparent belief that Coinbase has the capacity to play political kingmaker, saying “they are high on their own supply that they’re an important factor in the next election.”
Another ‘D.C. insider’ claimed, “members of Congress don’t like getting played and don’t like having their time wasted. Maybe [Armstrong] gets one more chance, but he burned an enormous amount of capital and credibility.”
Politico quoted Banking’s ranking member Elizabeth Warren (D-MA) saying, “Evidently, the industry writes the bill and if anybody in Congress has the nerve to slightly amend it, the industry says that the whole thing is off and they have canceled the law. These are folks who think that when they’ve bought themselves a Congress, then they expect it to behave the way they say.”
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Mixed response from crypto sector
Bill Hughes, senior counsel at Ethereum-focused software firm Consensys, tweeted that “pushing forward with a markup would have required further backsliding to achieve compromises that would permanently weaken U.S. crypto competitiveness.” Hughes celebrated Coinbase’s decision, saying it showed that the industry is “not desperate” and that the bill will ultimately advance because “it’s clear the industry is willing to walk.”
Arjun Sethi, co-CEO of the Kraken exchange, issued a lengthy tweet saying the company “remains fully committed” to advancing market structure legislation. Sethi said it’s “easy to walk away when a process gets difficult,” but he looked forward to “help resolve the remaining issues, move this process forward,” and get a bill onto President Trump’s desk for signing into law.
But the crypto sector was by no means unanimously supportive of Coinbase throwing a wrench in the works at this late hour. Peter Van Valkenburgh, exec director of the Coin Center advocacy group, tweeted that he was “optimistic about where the current market structure draft stands.” Coin Center’s communications chief Neeraj Agrawal added simply that “the bill is pretty good.”
Chris Dixon, a managing partner at the tech-focused venture capital group Andreessen Horowitz (a16z), tweeted that the draft was “not perfect, and changes are needed before it becomes law.” But “at its core,” the draft would “protect decentralization, support developers, and give entrepreneurs a fair shot.”
a16z’s head of policy, Miles Jennings, was more blunt, tweeting that the draft “isn’t perfect. But the legislation empowers builders to create an open and decentralized future … Nothing like it exists today and we must seize this opportunity. Freedoms are not easily won, but they are easily lost.”
Ripple Labs CEO Brad Garlinghouse said Coinbase raised “fair concerns,” but he was “surprised how vehemently they came out and said ‘look, we can’t support this.’ The rest of the industry really is still leaning in and supporting it and I think constructively trying to work through.”
It’s worth remembering that a16z and Ripple are roughly two-thirds of the financial support underpinning Fairshake, the crypto-focused political action committee (PAC), with Coinbase representing the other third. Considering a16z/Ripple don’t appear all that simpatico with Coinbase’s flexing, Armstrong might have less say in how Fairshake’s midterm election cash is allocated than he thinks.
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Stablecoins killed the CLARITY star
Armstrong said Thursday that “maybe the biggest” of his CLARITY concerns is preserving Coinbase’s ability to offer ‘rewards’ to customers holding stablecoins on the platform. Armstrong has repeatedly protested any move to subject exchanges to the GENIUS Act’s prohibition on stablecoin issuers offering yield/interest to token holders.
The Hill quoted Sen. Lummis saying this issue “was the killer” of Thursday’s markup. “If you’re teetering on the edge of a cliff, and you’re almost going to fall because of the interest issue, and then Brian Armstrong comes along and just adds that extra pound, that’s what took it over the edge.”
Armstrong said that during Wednesday meetings, Coinbase reps flagged “some pieces of text that caused us concern.” Ahead of the markup, “there were no amendments that had been filed that would have addressed those issues, so we didn’t see a path to actually fix that text before the committee voted.”
Last week, Banking member Angela Alsobrooks (D-MD) proposed a workaround that would prohibit third-party platforms offering rewards to users for passively holding stablecoins but permit rewards for users engaging in stablecoin ‘activities.’ However, Alsobrooks was reportedly unhappy with the extremely broad definition of ‘activities’ that ended up in CLARITY because it allowed too many exemptions.
It was thought that Coinbase might see sufficient loopholes in these exemptions to permit CLARITY to move forward. But with stablecoins representing a serious chunk of Coinbase’s overall revenue, there appears to be no willingness to let uncertainty threaten this cash cow.
Banks claim that allowing exchanges to offer interest to stablecoin holders will cause a mass ‘deposit flight’ as bank customers seek higher returns than those offered via savings accounts. Banks, particularly smaller community banks, claim this flight will negatively impact their ability to offer loans. Crypto operators like Coinbase (and the odd Columbia Business School prof) rubbish these claims, saying banks simply want to protect their existing monopolies.
On a January 14 earnings call, Bank of America (NASDAQ: BAC), CEO Brian Moynihan told analysts that he and his fellow bankers have “all expressed to Congress” that if mass withdrawals occur, banks are “either not going to be able to loan or they’re going to have to get wholesale funding and that wholesale funding will come at a cost that will increase the cost of borrowing.”
On JPMorgan’s (NASDAQ: JPM) earnings call, chief financial officer Jeremy Barnum said “the creation of a parallel banking system that sort of has all the features of banking, including something that looks a lot like a deposit that pays interest, without the associated prudential safeguards that have been developed over hundreds of years of bank regulation, is an obviously dangerous and undesirable thing.”
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Tokenized equities not so equitable
Last year saw numerous traditional securities firms push back on the crypto sector’s desire to offer tokenized equities to U.S. customers, arguing that crypto firms should be subject to the same regulatory requirements as tradfi firms.
Firms like Citadel urged the SEC not to grant “broad exemptive relief from the longstanding statutory definitions of an ‘exchange’ and ‘broker-dealer’ for those seeking to facilitate the trading of tokenized U.S. equities.”
CLARITY’s current text includes a section (505) stating that neither the SEC nor the CFTC are authorized “to adopt any rule, exemption, interpretation, or other action that would result in a tokenized financial instrument not being subject to the otherwise applicable rules, requirements, or restrictions for an untokenized financial instrument with the same rights and interests.”
The agencies also aren’t authorized to “exempt any person from an applicable registration requirement arising under the securities laws or Commodity Exchange Act (7 U.S.C. 1 et seq.) solely because that person conducts activities with tokenized financial instruments.”
Coinbase previously announced plans to launch its own tokenization platform (Coinbase Tokenize) early this year. But Armstrong’s claim that CLARITY’s latest draft contained a ‘de facto ban’ on tokenized equities is a view not shared by other tokenizing entities.
Gate Otte, CEO of tokenized public securities firm Dinari, told CoinDesk that the text merely “reaffirm[s] that tokenized equities remain securities and should operate within existing securities laws and investor protection standards.”
A similarly skeptical view was expressed by Carlos Domingo, CEO of Securitize, which in 2024 teamed up with hedge fund giants BlackRock (NASDAQ: BLK) to launch the latter’s tokenized fund BUIDL. Domingo believes a single set of rules will help integrate blockchain further into traditional markets.
Citron Research tweeted that Armstrong is “afraid of” Securitize because “Securitize already has the licenses to do [tokenized securities]. Coinbase wants the benefits of CLARITY without the competition it would create. They’re not pushing back because the bill is bad for crypto—they’re pushing back because a cleaner version might be better for Securitize than for them.”
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Ethics schmethics
Democrats weren’t happy with CLARITY’s failure to address the ‘ethics’ issue, aka prohibiting elected officials from profiting from crypto ventures. Dems want language that specifically includes Trump and his family, whose Trump Organization now relies on crypto for over 90% of its revenue.
The White House is strongly opposed to codifying any curbs on Trump’s ability to make bank off crypto, with Trump recently telling the New York Times that he believes “I’m allowed to” conduct business activities while in office.
Before the cancellation of Thursday’s markup, Scott told CoinDesk that ethics language “has got to go through the jurisdictional areas in our body, and that would be the ethics committee. We can talk about it; we can even work on language, but dropping it into the bill is far more difficult than we had anticipated.”
Scott suggested that ethics language could be incorporated into CLARITY as “part of the broader package at a later date.” This could include, during debate on the Senate floor, if/when the bill actually comes up for a vote by the full Senate (where it will require 60 votes for approval).
On January 15, several Democratic members of the House of Representatives’ Financial Services Committee, including ranking member Maxine Waters, sent a letter to SEC chair Paul Atkins expressing their “deep concern” at the SEC’s “dramatic retrenchment from its responsibility to investigate and prosecute cases involving crypto asset securities.”
The letter cites the number of high-profile crypto probes the SEC closed shortly after Trump’s second term in office began, “at a time when crypto companies are pouring money into the accounts of President Trump, his family, and his associates.”
The letter reminds Atkins that the SEC’s market manipulation case against TRON founder Justin Sun remains open, having only been ‘paused’ one year ago rather than formally dismissed. The letter asks Atkins to “revisit” the SEC’s decision to stay the litigation against Sun and “renew that action.”
The authors worry that the SEC’s pause “may have been unduly influenced by Sun’s relationship with the Trump family, including his significant financial contributions to their businesses.” These contributions include Sun’s eight-figure support for the Trump family’s DeFi project World Liberty Financial (WLF) at a time when it seemed that WLF’s debut was dead on arrival.
The letter reminds the SEC that its case against Sun “was not speculative or marginal—it was built on a rigorous investigation that resulted in detailed allegations of systematic securities violations confirmed by judicial rulings and co-defendant settlements.” Viewed in that light, the SEC’s “failure to hold Sun accountable suggests that it may be part of a pay-to-play scheme orchestrated by Sun.”
While it seems unlikely that Atkins will give a damn about the Dems’ efforts to stiffen the SEC’s spine, the letter encourages “any current or former SEC employee, or any other person, with information relevant to this matter to contact the Committee directly via the Committee’s Whistleblower Form.”
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SEC v ZEC
The Dems’ letter came one day after the Zcash Foundation announced that the SEC had informed it that “it does not intend to recommend any enforcement action or other changes” against the Foundation. The Foundation said it received a subpoena from the SEC in August 2023 “in connection with an inquiry designated ‘In the Matter of Certain Crypto Asset Offerings (SF-04569)’.”
The subpoena was issued during a period when the SEC was probing a number of crypto firms on suspicion that the tokens issued by these firms were unregistered securities. The Zcash Foundation issues the privacy-focused ZEC token, the fiat value of which enjoyed a healthy spike following the announcement.
While there’s no direct Trump family connection to ZEC, last November saw two of the president’s biggest financial supporters—Cameron and Tyler Winklevoss, founders of the Gemini (NASDAQ: GEMI) exchange—launch Cypherpunk Technologies Inc (NASDAQ: CYPH), a ZEC-focused digital asset treasury firm that aims to acquire “at least 5% of the total ZEC supply.”
Privacy coins like ZEC have proven highly controversial due to their ability to obfuscate their digital trail, making them ideal for bad actors looking to launder ill-gotten gains. Several exchanges delisted ZEC and other privacy tokens a few years ago due to increased regulatory pressure.
But last month, Zcash founder Zooko Wilcox was an invited guest at the SEC‘s Roundtable on Financial Surveillance and Privacy. SEC chair Atkins’ opening remarks didn’t specifically address privacy coins, but he said the SEC “must make certain that Americans can use [privacy] tools without immediately falling under suspicion.” Atkins expressed interest in learning “how crypto’s privacy tools can lessen, rather than increase, the need for mass financial surveillance.”
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Source: https://coingeek.com/us-market-structure-plan-in-chaos-as-coinbase-yanks-support/
