Hello and welcome to Regulator, the newsletter for Verge subscribers that goes into tech shenanigans that take place in the backrooms of Washington. Really, it sometimes does feel like the online series The Backrooms: a parallel universe with no internal logic, evil corporations lurking in the background, and mind-rending eldritch horrors around every corner. (Not a subscriber yet? Sign up here today. Have any tips about mind-rending eldritch horrors lurking in DC? Send that intel to me at [email protected].)
Speaking of liminal spaces and endless hallways that drive their inhabitants insane: Today, we’re going to Capitol Hill, where the Senate is, at long last, finally revisiting the crypto market structure bill known as the Clarity Act. And it is, indeed, driving everyone insane.
On Sunday, as the crypto industry was about to take victory laps for getting the Clarity Act back to the Senate, the American Bankers Association, one of the largest financial industry interest groups in the country, sent out an email that immediately ruined their Mother’s Day. Apologizing to all the moms he’d messaged, Rob Nichols, the president and CEO of the ABA, begged the CEOs on the email, from Wall Street to local community banks, to drop everything and start contacting their Senators ASAP — “Please encourage your employees to do the same” — because the Clarity Act posed an existential threat to their industry. “The current version of the legislation, although improved from an earlier version, still does not adequately prevent crypto companies from offering interest-like rewards on payment stablecoins,” wrote Nichols, warning that if the “loophole” was not closed, customers would be incentivized to move their cash holdings into stablecoins, leading to a bank deposit flight that would severely undermine banks.
Rarely does one see Wall Street panic this much over pending legislation, but the Clarity Act, which is slated to return to the Senate Banking Committee for markup on Thursday, does pose a meaningful threat to traditional finance — or at least, the tradition of “holding money in bank accounts that pay interest to customers.” This is not a regular bill that hammers out finer details addressing a preexisting issue in a regulated industry. This is the market structure bill — i.e., the comprehensive law that will instruct the market on how stablecoins, or digital tokens pegged to the value of $1 USD, will be legally regulated. In fact, it’s so consequential to the future of crypto that back in January, just before the Senate Banking Committee began debate over the bill’s draft, Coinbase, the largest US company in the industry, abruptly announced that it would not support the version as it existed, claiming that the banks had rewritten it in a way that would harm crypto in the long term and kicking off months of furious negotiations over the bill’s language. (As an industry watcher pointed out to me at the time, one cannot pass a crypto market structure bill in the United States without the support of the largest crypto company in the country.)
The upside for the crypto industry is that they all seem to be on the same page now. After months of negotiations held at the White House, organized by former special adviser on AI and crypto David Sacks and his administration underlings, Coinbase reached a compromise with the other digital asset companies and the major financial institutions represented in the meetings. “The word ‘compromise’ is etymologically very accurate,” said Vassilis Tziokas, the vice president of growth at the blockchain technology company Matter Labs, who was not in negotiations but has analyzed all 300-plus pages of the current bill. As the language currently stands, the bill does not allow stablecoins to offer cash interest yields — but it doesn’t prevent them from offering yields, either. It’s enough of a legal window for crypto companies to offer activity-based rewards on transactions, similar to how credit card points can be redeemed for things like flights. “The current wording on the Clarity Act is perfect for the legal industry, because once Clarity becomes a law, it depends on lawyers to interpret what ‘activity based rewards’ means,” Tziokas noted.
The creative wording seems to have made everyone in the room not unhappy — especially since the administration has made it clear that passing a crypto market structure bill is a top priority for them, demanding that the bill end up on Trump’s desk by July 4th. “For the people who have been living in it full time, it’s really compromise #150,” joked Peter Smith, the CEO of Blockchain.com, whose team has been in contact with all the key players involved in the drafting and negotiation process.
But now that there are words on paper, and those words are in front of the Senate Banking Committee, which regulates securities, it appears that every major crypto player and their TradFi counterparts are flying into DC for last-minute backchanneling, lobbying, and leaking damaging opposition research to Capitol Hill reporters, before the committee convenes for markup on Thursday. The committee markup process is one of the best and last opportunities to meaningfully change legislation before it gets taken to the floor for a full vote, and the committee’s members can still be swayed. The process of swaying those senators, however, is getting somewhat tricky.
The public-facing opposition to Clarity comes from the community banks — not the monoliths on Wall Street, but the smaller operations that service regions, states, and towns. While a JPMorgan Chase-sized bank could handle customers moving their cash to stablecoin, these smaller banks would be threatened. But these smaller banks are also local political powerbrokers that can place more meaningful pressure on their elected officials than a large nationwide entity can. Sen. Katie Britt (R-AL) has been seeing the most pressure on this front. To a somewhat more complicated extent, so has Sen. Thom Tillis (R-NC), whose state is home to several major banks, including the headquarters of Bank of America.
The second layer of opposition: the big banks, which are also members of the same trade associations as the community banks. Their concern is the potential loss of high-net-worth individuals rather than the general consumer: If their wealthy clients decided that stablecoin wallets and companies would offer them more return on investment, either through interest yields or a rewards program, they might ultimately decide to move their cash out of the banks. (A major Wall Street bank can’t win public sympathy with that argument, though, so don’t expect to see JPMorgan Chase making a fuss.)
Then there’s the Donald Trump of it all. The Democrats who oppose the Clarity Act are pointing to the lack of an ethics clause that would restrict government employees, including lawmakers, from profiting off of crypto interests while in office. That category would include Trump, whose family has investments in several crypto companies. “This bill puts investors, our national security and our entire financial system at risk — and it will turbocharge Donald Trump’s crypto corruption,” said Sen. Elizabeth Warren (D-MA), a harsh critic of the crypto industry and the ranking member of the Senate Banking Committee. “In just one year in office, the President and his family have raked in at least $1.4 billion in gains from crypto deals alone, and yet this bill stunningly includes zero provisions to prevent that.”
And then there’s the actual backchannel negotiations, which is where things get goofy. “An interesting last-minute development is that it looks like some kind of housing bill has been rolled into the Clarity Act itself,” said Sam Lyman, head of research at the Bitcoin Policy Institute, which has been closely tracking the bill for protections on open-source software developers.
According to Lyman, the deal, a federal program funding local housing development called the Build Now Act that was tacked onto the very end of the draft, seems to have been a concession made for both Sen. Warren and Sen. John Kennedy (R-LA). “The first thing is, it ups the bipartisan bonafides of the bill, if you’re getting some legislative language that’s supported by a prominent Republican and a prominent Democrat,” Lyman noted. “It also gets Senator Kennedy more supportive of the bill because he was one of the few Republicans who was dragging his feet somewhat when it comes to the Clarity Act. But getting this language in the bill seems to be some kind of concession to him to support Clarity while also allowing Warren one of her concessions as well.”
In the meantime, the public kayfabe is continuing to play out, in particularly dramatic ways. Major crypto policy figures are beefing with the ABA on X. The schedule for Coinbase CEO Brian Armstrong is getting leaked, but only the parts that make him look like he’s currying favor with Republicans instead of Democrats. The crypto community has spent the past day dunking on a paper written by Bill Nelson, the head of research at the Bank Policy Institute, for misrepresenting crucial statistics from a Cornell professor’s research paper on digital assets, and alleging that Nelson used AI to write it. (The Cornell professor, Lin William Cong, issued a thorough takedown of Nelson’s blog post.)
And a top-tier silly season moment, as Lyman pointed out, was the strangeness of Warren, a huge crusader against the banks, somehow coming down on their side in this fight.
“I feel like it’s the biggest irony that no one sees,” he joked.
I would like to share a beautiful tribute to Ted Turner, and please read this in Ric Flair’s voice, because that’s how Turner would have wanted it: