The Breakdown - Senate Passes Historic Stablecoin Bill

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, June 18th, and today we are talking about how the Senate has passed the stablecoin bill. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown. pod. All right, friends, most of our conversation today is going to be about stable coins. We've got some political news and some functional news. But as I intend to do for a little while now, let's do a quick check-in on the Iran-Israel situation and the markets continue to reaction there. The conflict

Starting point is 00:00:54 yesterday continued to escalate as President Trump considered committing U.S. forces. The White House called a full lid on press availability early yesterday evening as speculation rose about a high-stake strategy meeting. Reports suggest that the president has been offered two options by national security advisors. One, dispatch Vice President J.D. Vance and special envoy Steve Whitkoff to hold immediate face-to-face talks with Iranian leadership, or two, approve U.S. aircraft to join in the bombing. The mission being considered is deploying bombers to take out the underground fortout uranium enrichment facility. The mission would require 30,000 pound bunker-busting bombs, which are too large to be carried by aircraft operated by other countries. These munitions were developed in the 2000s but have never been

Starting point is 00:01:33 used. The facility is deep underground, so it would require repeated bombing to penetrate. If it goes ahead, it would be one of the largest bombing missions in terms of destructive power in a very long time. Military assets have been moved to the Middle East to await a go-no-go order from the president. The choice is a stark one and has led to a rift in the America First movement that campaigned to end forever wars in the Middle East. Representative Marjorie Taylor Green tweeted that Americans want economic policy, quote, not going into another foreign war. Representative Thomas Massey has joined with Democrat Ro Khanna on a bill to prohibit involvement in Iran, commenting this is not our war. In a public appearance, J.D. Vance tried to make the case for American involvement to the base,

Starting point is 00:02:11 stating that Trump, quote, may decide he needs to take further action to end Iranian enrichment. He said that people are right to be worried about foreign entanglement after the, quote, last 25 years of idiotic foreign policy, but also argued that the president had earned some trust on the matter. Right now, it appears that the prospects for de-escalation are fairly grim. Before the media blackout, Trump posted, we know exactly where the so-called supremacist. leader is hiding. He's an easy target, but is safe there. We're not going to take him out, kill, exclamation mark, at least not for now. But we don't want missile shot at civilians or American soldiers. Our patience is wearing thin. Three minutes later, he added in all caps, unconditional

Starting point is 00:02:45 surrender. Markets continue to decline as tension ramps up. Stocks and Bitcoin plunged together yesterday with Bitcoin recording 14 hourly red candles in a row. The price bottomed out at 103,500, so no major spikes in either direction. 52 Skew remarked that this was a very controlled sold sell-off, tweeting, so far this has been pretty well managed by the market. No uptick in market volatility, average volume, no panic positioning. For a 3% or so pullback so, the market isn't panicked yet, although there's clear hedge bias. Previous dips were 5% or so, but had aggressive shorting, spot selling and uptick in volatility. So this means the big move has yet to occur and is brewing. Material indicators commented, this is what manipulation looks like in the

Starting point is 00:03:24 Bitcoin order book. If price breaks below 105k, be prepared for a rug pull at 104K. Now, that level was crossed with no rugpole, but it's clear that most traders aren't looking to take big swings at the moment. Decobaisi letter wrote, while gold is strong, it continues to paint a consistent narrative. We are not on the brink of World War III. Oil prices are up around 2% today, despite ongoing attacks between Israel and Iran. Meanwhile, the 10-year yield is nearing 4.5%. Markets say this won't be a long-term headwind. Also, while the price action isn't showing Bitcoin being used as a flight to safety, a different story could be playing out of the flows. Bitcoin ETFs have seen consistent net inflows over the past seven days, with over $2 billion added to the funds. We will continue to

Starting point is 00:04:05 keep our eyes on this as the situation evolves. However, for now, let's turn to our main story, which is that the Senate has passed the stable coin bill. Yesterday afternoon saw the Senate vote 68 to 30 to advance the Genius Act across bipartisan lines. This was the exact same margin as the cloture vote from last week, meaning renewed concerns around the president's crypto ventures apparently shifted exactly zero opinions. We did get a last-ditch effort from Elizabeth. with Warren, to claim that the bill, quote, actively facilitates Trump's crypto empire, but it was all for not. The mood from Senate Republicans was jubilant. Banking Committee Chair Tim Scott, who helped shepherd this bill through Congress, said, it's a historic day for our nation. I'm so excited we got it

Starting point is 00:04:44 done not as Republican versus Democrat, but as Americans fighting for reform. We're going to see full adoption across the spectrum that will make it easier for people to do business in America. Senator Bill Haggerty, the lead author of the bill, tweeted, with genius that United States is one step closer to becoming the crypto capital of the world. It establishes a pro-growth regulatory framework for payment stablecoins. This bill will cement U.S. dollar dominance. It will protect customers. It will drive demand for U.S. treasuries.

Starting point is 00:05:10 Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversify to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of tradfi and crypto, and one of the benefits for a lot of us is that Grayscale products are available

Starting point is 00:05:39 right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visitgrayscale.com. Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. Spirits were equally high for industry figures, with Coinbase Chief Legal Officer Paul Grewell commenting, today we saw the United States Senate pass major crypto legislation with bipartisan support.

Starting point is 00:06:09 A year ago, I would have thought this was at best a fever dream. Think for a moment on how far we've come. Now, one of the reasons this is a historic moment is that stable coin legislation has grown in stature as it worked its way through Congress. Two years ago when the bill was first being discussed, it was mostly about setting reserve standards so that Luna could never happen again. In other words, it was about regulating products in our then small corner of the financial environment. Since then, we've seen every major financial institution in the world get on board with the idea that stablecoins are the future

Starting point is 00:06:37 of money and a vast improvement on the current electronic banking system. Mike Cahill, the CEO at Doro Labs commented, the stablecoin bill is important. With major financial institutions already exploring issuance, clear federal guardrails will legitimize stablecoins. is a new category of programmable money, integrated into payments, settlement, and even Treasury Management. If the U.S. gets this right, it won't just leave the crypto market. It will write the rulebook for the next global financial system. Touching briefly on the contours of the bill as it was passed, we didn't end up with that amendment to address Trump's table coin. Although reporting suggested a toothless amendment was on the table to appease Democrats, nothing was brought to

Starting point is 00:07:12 the final vote. More generally, the bill requires one-to-one reserves held in T-bills or cash equivalents. It also requires redemption in a timely manner, monthly reserve reports, and an annual independent audit. Stable coins issued under the bill can't be marketed as legal tender or covered by FDIC insurance, and interest-bearing stable coins are prohibited. The bill limits issuers to banks and licensed non-bank entities. Federal licenses will be required for stable coins over $10 billion in market cap, but smaller stable coins can be issued under state licensing. The bill also provides that state licenses are to be nationally recognized, so the smaller issuers out of states like Wyoming can operate interstate. The bill provides custody standards for reserves, but also mandates that the

Starting point is 00:07:50 issuers' private keys are to be held with a chartered bank or other regulated custodian. This is mostly just an interesting curio as the first time that crypto custody standards have been formally laid out in legislation. Stablecoin issuers are required to freeze tokens on a court order, making some issuers like Maker technically noncompliant. The Treasury also has the authority to block noncompliant foreign stable coins, but the bill allows reciprocity with comparable foreign regulations. The legislation also comes with a three-year grace period, but Tether will need to make some big changes to come into compliance or exit the U.S. Finally, there are tough penalties attached for non-authorized issuance, with million dollar a day fines and up to five years in prison as maximum penalties. The bill now moves to the

Starting point is 00:08:29 House, and there are a few pathways it could take. The simplest path is rubber-stamping the language from the Senate bill and shifting it quickly to the president's desk. Senator Scott says he's been working with House GOP leaders along the way, and there's a consensus on the bill's language. His plan is to get moving on market structure as a separate Senate bill this month and have everything wrapped up by August. Senator Haggerty also wants to get runs on the board, stating that his, quote, goal is to just put a win in place for the American public and have it for the president to sign before the 4th of July. Representative Warren Davidson isn't so sure. He told Politico, the Senate clearly doesn't have the consensus bill to deal with market structure. His preferred path is to take, quote, one combined

Starting point is 00:09:06 bill to the Senate, adding that it's, quote, the only way to get them to take action. I think that's what it's going to take to get the Senate to deal with House-based legislation. Haggardi is concerned that this path risks scuttling the entire legislative agenda, commenting, it's very clear to me that we have an opportunity to have a great win here for the American public right now. If the bill were to be modified to include market structure, it would have to come back to the Senate for a lot of work. All in all, it looks like extremely positive legislation for the industry. Circle's business model fits the regulations, and we avoided staple coins getting handed over exclusively to incumbent banks. The yield-bearing stablecoin issuers will need to pivot and rebrand as money market,

Starting point is 00:09:40 funds, but that shift doesn't need to take place immediately. The original recipe of makers decentralized stable coin is probably not going to make it without the ability to freeze funds, and the future of tether remains the big open question. Ultimately, though, NYU Stern Professor Austin Campbell wrote, there is bipartisan consensus in the Senate that stable coins are good for America and good for the dollar. Regulation of the space is good for its development, and that we can draw a straight line from money market reform to the NYDFS to genius and know it works. I think pretty clearly an exciting day in the progress of this industry. And one example of how it might change things is that, of course, the major narrative around the passage

Starting point is 00:10:17 of the Genius Act is that it will open the floodgates for stablecoin issuers, and point as the early evidence seemed to suggest that to be the case. Yesterday, for example, J.P. Morgan announced plans to launch their own stable coin called JPMD. The bank is technically calling this asset a permission deposit token, one of the funnest names for a product you'll hear all year, and so it won't technically be classified as a stable coin under the new legislation. It will only be available to approved institutional clients in the same way as BlackRock's tokenized money market fund. The token will launch as a pilot expected to run for several months and then expand if it's successful. Regardless of these caveats, regulatory clarity

Starting point is 00:10:52 is clearly encouraging the nation's largest bank to move on chain. The token will be issued on Coinbase's Ethereum L2 Base. GP Morgan has been using private blockchains for years, but has so far been hesitant to use public blockchain infrastructure. That means, in other words, that this is actually a massive shift that's only possible now that regulations are coming into focus. The Coinbase partnership is also quite notable. The base Twitter account posted, J.P. Morgan chose base to take advantage of sub-second, sub-sent transactions for their clients, giving institutions access to near-instant settlement and real-time liquidity. Moving money should take seconds, not days. Commercial banking is coming on chain. Now, a major infrastructure partnership with

Starting point is 00:11:29 JP Morgan is a boon for Coinbase, but it opens up questions about the future of the crypto exchange. Coinbase has ambitions beyond being a service provider to the existing financial institution. Obviously, they want to grow to become a major financial institution in their own right, meaning theoretically that Coinbase will at some point need to decide if they want to truly compete with JP Morgan, or stay frenemies forever competing and collaborating all at the same time. Still, obviously for the here and now, bringing one of the largest financial institutions in the world on chain is a huge step towards taking crypto mainstream. And yet, not everyone, is impressed. Oman Malikon, a Nadjeng professor at Columbia Business School, made the point that

Starting point is 00:12:04 crypto pilots are so 2021, tweeting, tweeting, tweeting, they wouldn't announce a public pilot that proves touching water makes you wet. They'd build a new product and stealth. Why tip the competition or risk upsetting your regulator? He made the point that permission tokens are still a walled garden with limited usefulness, and that JP Morgan would be better off servicing stable coin issuers than competing. Still, it's clear which direction this is all heading in. Speaking to just how rapidly assumptions are being updated, Treasury Secretary Scott Besant tweeted, Recent reporting suggests that stablecoins could grow into a $3.7 trillion market by the end of the decade. That scenario becomes more likely with the passage of the Genius Act. That report was from

Starting point is 00:12:41 Citigroup who projected a stablecoin market between 1.6 and 3.7 trillion by 2030. Until recently, the top projection being repeated by Besant was 2 trillion, so it appears that the Treasury Secretary is getting even more bullish. So lots of exciting things happening in the world of stablecoins. for now that that is going to do it for today's breakdown. Appreciate you listening as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - Senate Passes Historic Stablecoin Bill

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