What the GENIUS Act Means for Stablecoins

Transcript

[Music] Welcome to Web 3 with A16Z Crypto. I'm Robert Hackett. Today we've got a news episode for you where we discuss the stories that matter and separate the signal from the noise. Today we're talking about the passage of the Genius Act. That's the guiding and establishing national innovation for US stable coins act which provides clear rules of the road for stable coins in the US. Here to discuss are some of our A16Z crypto teammates who have had a front row seat to the action. We've got Miles Jennings, A16Z Crypto's general counsel and head of policy, plus A16Z government affairs

partners Michael Reid and Ben Napier. As always, none of the content should be taken as tax, business, legal, or investment advice. Please see a 16Z.com/disclosures for more important information, including a link to a list of our investments. Okay. President Trump just signed into law the Genius Act a day after the House of Representatives voted to pass it. What is the Genius Act and why does it matter? Miles, tell us. >> Sure. So, the Genius Act provides a regulatory framework for the regulation of stable coins. We expect this to be kind of the foundational piece of legislation that's going to allow for stable coins to really revolutionize how payments are done in the United States.

It's primarily an issuer focused regulatory regime that establishes criteria that issuers of stable coins have to meet in order to to be compliant with the law. That's really important because obviously stable coins are supposed to represent a dollar and so it's important to make sure that you know in particular the underlying collateral that backs those assets actually means that those assets are worth a dollar. The crypto industry has a long history of experimenting with these types of things and there are instances where the collateral backing stable coins has turned out not to be there and as a result of that that's caused a lot of consumer harm and lost funds. People might remember the Terra Luna debacle where the stable coin broke the peg and cratered and left a lot of

people in the lurch. So this bill you're saying is designed to prevent things like that from happening again. That's exactly right. It gives regulatory clarity, establishes, you know, clear thresholds around collateral requirements, requires assets to be backed one to one so something like Teral Luna doesn't happen again. That trust is really important in establishing that stable coins function as dollars. when you hold a dollar that you take out of a Bank of America ATM or a City Bank ATM, it's always a dollar. It's always worth a dollar. And and this provides a framework for that type of treatment of stable coins as money. And that's going to open up a lot of opportunity for stable coins to revolutionize payments. Now that this law has been enacted and it has passed, is it the case then that stable coins

are now functionally the same as the US dollar? Can we consider them effectively equivalent? Well, I don't think we're quite there yet. One of the things that's that's necessarily required when you're kind of treating, you know, an asset as money is that there's no friction in in the way that those assets can be exchanged. Now, what we're going to see over the course of the next year is a lot of different people enter into this space and issue their own stable coins. There's going to be some stable coins that have very deep liquidity. Tether and and USDC already obviously have a lot of of assets outstanding, but where you have smaller pockets of stable coins, maybe they won't trade one for one with other stable coins because, you know, the liquidity constraints that are in place. So, there's going to be a need

to be a lot of solutions that entrepreneurs are working on to make sure that stable coins do integrate with the financial system and that they do function as money. We're not quite there yet, but now we've kind of established the trust level that makes all that building possible. So the regulation is in place and now that kind of clears the way for entrepreneurs to fill in the gaps and make the technology, you know, as powerful as its promise can be. That's exactly right. Okay, so let's talk about the House vote because this was a seriously high drama affair. There was a lot of back and forth, people pulling out then, you know, coming in and rallying support for it. What actually happened? Michael, Ben, you guys were there. you were you had a front row seat to all this action that

was going on. Tell us what it was like and how it came about that it got 308 votes in support next to 122 against and that's with 102 Democrats supporting. That is a lot of bipartisan support and in fact 31 more Democrats than voted for FIT 21 which was the last major piece of crypto legislation hit the House floor. So that is just a huge testament to the bipartisan nature of this bill. But it seemed like it was a slog to get there. Ben, you're responsible for liazing with the House Republicans. So what was going on there? They're in the majority position. They were big supporters of this trying to push it through. What did you see behind the scenes? Yeah. So when

Republicans came in to this majority, they were becoming very very crypto friendly. The speaker Mike Johnson and majority leader Steve Scaliz were really targeting the summer to put crypto legislation on the house floor. And so as part of that plan, they had three pieces of legislation that they had scheduled for this week. One was the >> people have been calling this crypto week that has been sort of like the branding crypto week. >> Every week is crypto week at A6Z crypto, but it's pretty extraordinary that all of DC was participating in a crypto week. >> Absolutely. Absolutely. And so they targeted three pieces of legislation they wanted to have on the House floor.

The first was the Clarity Act, which is the Market Structure bill. The second was was the Genius Act, which is coming from the Senate and was going to go straight to the president's desk after House passage. And then the third was an anti-CBDC bill. And by the way, CBDC is a central bank digital currency. It's this idea that the Fed would put out like a Fedcoin that people could use which would be sort of like the standard US dollar rather than having a sort of more like a commercial banking relationship that we have now where like you get dollars through a bank that you bank at. And Robert, I think it's just important to know why there's kind of this, you know, movement by some House Republicans on CBDC's. The way you described it sounds pretty good. You know, we trust the government to issue

our dollars normally. What is the problem with the CBDC that some people see, right? And and the issue there is the potential for it to be used to surveil Americans that the federal government would then be able to see every transaction that a person that uses that currency undertakes. That's a level of oversight and and privacy violation that the US government doesn't currently have. And so a lot of people that prioritize privacy think that CBDC's would be a step in a direction that would be very very dangerous and very undermining of American freedoms. >> I'm glad that you underscored that point. I think it's very telling that one of the most advanced CBDC's out there right now is the digital ren minimi from China which is a country that has no problem with surveillance.

In fact, they think it's a feature, not a bug. But here in America, I think more people worry about it being a bug. Yeah. So really the the start of all the drama was in the House before you can actually get on to consideration of those bills, you have to pass a rule that provides for their consideration. And those rules are generally done on a a partyline basis. And so right now there's a very narrow majority in the House. It's very easy for a small group of Republicans to hold up those rules from getting passed and to allow leadership to get on to the bills they want to consider for that week. And so you had a small group of of Republicans who were holding out their vote on that rule. They were attempting to attach the CBDC bill to either the Genius Act or the Clarity Act. After a

lot of negotiations and some late nights, the House leadership was able to get to a place where members felt comfortable moving forward with the bills as is for them all to move separately. And we were on the House floor the next day. So, this smaller group of Republicans that were digging in their heels on the anti-CBDC measure, what got them over the hurdle because the anti-CBDC measure did not get added to the stable coin bill. >> Yeah. So they wanted to attach it to something that they saw was going to become law or was likely to become law over the next year or so. And ultimately what they landed on was instead of, you know, muddying the waters of either of those two crypto bills, they sought to now potentially put the anti-CBDC bill onto a an annual defense bill that would

be expected to be on the floor in the fall. And that's a bill that will also almost always get signed into law. And so I think that that made them a little bit more comfortable to move forward with the original plan. One more question for you, Ben. This negotiation to add the anti-CBDC measure into the defense spending bill, would that have happened without this small cohort of Republicans raising a stink about it before the final vote? Probably not. The anti-CBDC bill is an important one to House Republicans and Senate Republicans as well, but it didn't have a lot of backing on the Democratic side. And so, there wasn't much of a path for it to get signed into law. It was more of a messaging bill. Now there will be attempts to add it to the defense bill.

That will be a long negotiation. Some things make it through, some things don't. Certainly nothing guaranteed there. >> And of that that highly motivated smaller group of Republicans. Did any of them not support the bill in the end or was this enough to win them all over? >> There was a small group of Republicans in the end that did not vote for the Genius Act, 12 of them. I think if you were to ask them that the lack of having asurances on anti-CBDC is probably the reason. >> Got it. Michael, let's turn to you. So, you've been working closely with the Democrats, talking to a lot of them, seeing what's been going on. How did so many Democrats get one over in the end to support this bill?

>> Well, we've been really seeing is a an emerging group of pro- crypto, constructively engaging crypto members on the Democratic side of the aisle. It's been steadily emerging over the last several years. And really, the Genius Act is the first step in that. Hopefully, Clarity Act will be the next step in that. Well, we really saw, like you mentioned, last Congress with the Fit 21 vote where 71 Democrats voted in favor of the Clarity Act. >> And that was seen as a major victory, a major bipartisan victory for that bill to get 71 supporters from the Democrats. >> 100% that really set a floor for us to be able to know what kind of level of engagement we can have happen here. So now we were able to build upon that effort from 21. So seeing 102 Democrats being able to vote in favor of the

Genius Act, which included not just people who have been seen as industry friendly necessarily all the time, but people who recognize the need for strong regulation. >> Yeah. Who were the biggest surprises? >> Well, when you look at House Democratic leadership, you saw leader Jeff vote in favor of Genius Act. You saw Whip Katherine Clark vote in favor of the Genius Act. You saw House Democratic caucus chairman Pete Aguular vote in favor of the Genius Act. You saw the DC C the the House Democratic campaign arm Susan Delb Benet vote in favor of the Genius Act. So we had a lot of conversations behind the scenes with members who were comfortable with voting in favor of Genius Act and voting in favor of the Clarity Act but were were concerned that there was not going to be enough support from other colleagues of theirs and they thought they were going

to be left on an island. But once you start seeing that level of support from the top levels of leadership in that space, it really makes it a lot easier for members to be comfortable taking that vote. Once they start to see that level of broad support across the gamut from progressives and moderates, from new members and older members, once you started seeing that kind of a a broad coalition of members on the Democratic side, it was a lot easier for them to vote. And I'll I'll also say that it it also helped that we had a strong Democratic vote in the Senate on on the Genius Act when it passed over there with 18 Democrats voting in favor of it.

So it really started to reassure Democrats that this was an area that not only was good policy but good politics for them to be able to support. >> So for anybody looking at this on the sidelines, I don't think anybody really expected it to come out with such overwhelming force in favor of this bill. I think people might have expected a little bit more partisanship. Was there a moment that gave way that enabled more people to get on board with this where it just kind of gained momentum and really took off? >> What we heard from members is we need strong regulation here. The current framework leaves too many Americans vulnerable and we need to do something here. A lot of the concerns that we had on the Democratic side were largely related to some of the executive branch and their involvement in this space and

members were concerned that a vote for some of these crypto bills would be somehow endorsing, you know, some of those executive branch behaviors. But the more we dig into it, you know, these are not bills that were written to support the president or to support those activities. These are bills that are really truly meant to regulate this space regardless of who's in office. And as we were able to kind of have those conversations with members to reassure them and that go through the text sometimes line by line, page by page, we were able to reassure them that they were making good policy. And there have been plenty of times in the past where the skepticism of the minority in this case Democrats would lead to the majority taking their ball and going home that they were like, "Well, we have

enough. We have the majority here. We can vote on this on our own. we'll just pass our own bill, send it over to the Senate, negotiate there, and we'll come back and see where the the ducks lie. But in this instance, I can assuredly say that the commitment from the majority to maintain that level of bipartisan support to get realistic and real engagement from Democrats on this from the jump and to protect that despite some of the concerns from um some of the the more aggressive members on the Republican side. for those members who have been authoring this and leading this to maintain the support of Democrats was it was essential in terms of being able to have such a big number.

>> One of the the important pieces that Michael hit on there is ensuring that we kept this delicate coalition together throughout the whole process and going back to the CBDC issue. you add the CBDC language into either the Genius Act or the Clarity Act and you immediately disrupt that delegate coalition and it becomes more of a a partisan bill and you know would probably then potentially end up dying in the Senate where you need 60 votes and a more bipartisan vote to clear that chamber. So it was a really really important collaboration between Republicans and Democrats.

>> Okay. So now that the law has been passed, who wins and who loses? Miles, you want to take this? Sure. I mean, I think it's it's an obvious win for for the industry, for the players in the industry that that are working on stable coins. It's a win for anyone that is is trying to build new payment rails and establish kind of more efficient payment systems in the United States. So, that goes from everyone like Circle to Stripe and others. And the other people that win are consumers, right? They're ultimately going to have a better and more efficient payment system. And that means lower fees. merchants as well should see a lot of benefits in in terms of their overall margins. Just small little tiny fees like this can make a

very big difference for companies that have very low margin businesses. And so as a result, things like restaurants, you know, mom and pop shops stand to benefit a lot from this. I would say that the the losers are probably the financial intermediaries that, you know, have long taken, you know, points on every single transaction, every every swipe of a credit card or debit card. the amount of fees that go to the intermediaries are are probably the ones that are going to get squeezed here. At the end of the day, this this was quite a bit of a no-brainer. I mean, there's just so many benefits to be had. And then, you know, the US government is also a winner here because a lot of these stable coins will be backed by US treasuries. As stable coins proliferate, that should increase demand for US treasuries, which should help bring down

US borrowing costs, >> of which there are many and rising. Hey, it's so that is a that's an >> does this bill have anything to say about decentralized stable coins or does it pertain mostly to centralized stable coins and then you know what does that mean for the decentralized future that people in the crypto industry are fighting for? Yeah. So I think the bill you know does have some provisions around kind of intermediaries or you know anyone that makes available stable coins. So there are carveouts though in safe harbors for decentralized finance which is good. The bill also does not provide a regulatory framework for the issuance of stable coins via smart contracts. So decentralized stable coins. Now there's also a provision in

the bill right that it clearly establishes that permitted payment stable coins, the stable coins that are regulated under the bill are not securities. So I think that the ball gets put into the court of the SEC with respect to decentralized stable coins. Now, there are a lot of good arguments for why, you know, stable coins that have been issued by autonomous smart contract protocols are not securities. They don't kind of have the same risk that ordinary securities do. But there are a lot of decentralized stable coins that are not really decentralized. And you use scare quotes there for people listening. That's right. And I think that those are going to become into focus for the SEC. and and that could become an area where we see, you know, a little bit more clarity does shine light on the shadows and and that could make

it harder for bad actors to profit in this space. In previous years, it has not been in the industry's favor to leave decision-m up to the SEC. Usually more helpful to get something written into law. So, I guess that just remains to be seen how that will shake out in the years ahead. >> Yeah. Well, the nice thing is at least under this SEC, we're getting, you know, notice before we get activity from them, right? So the SEC has already put out guidance that certain types of stable coins are not securities and so I think we can expect a more constructive relationship with them on a go forward basis. Okay. So we spent the majority of this time talking about the Genius Act, but there was another act that was voted on around the same time which is the Clarity Act. We'll probably do an

episode about that once it goes to the Senate because it passed out of the House. But that act too, that bill, it got more support than Fit 21. it got more Democrats on board which was also kind of a shocker. Do you have anything to add there? Any sort of insight about once again, you know, not only how Genius got so much bipartisan support, but how Clarity the market structure uh bill that the industry has been hoping for, how that got over the the finish line.

>> Sure. Like you mentioned before, there was a previous floor of 71 Democrats who would vote in favor of FIT 21, which was the previous market structure bill. Coming into this Congress, there was an optimism that we'd be able to grow on those numbers, but that optimism started to kind of fade as there started to be more partisan concerns regarding President Trump and his involvement in the crypto space. Um, so there were concerns from some of the lead Democrats that this bill needed to be stronger when it comes to restricting president and his family's interest in those spaces, but th those end up being the political concerns that lead from a 71 vote number on the FIT 21 and coming in on an updated and improved clarity act, which should conceivably off the jump

have more Democrat support simply on the merits of the bill. It's a It's a cleaner bill, has more regulatory guard rails, and all the areas that Democrats largely want were improved in this bill, but the president's actions in this space led to Democrats openly reconsidering their support of the bill. So, as a result, some of the predictions had been that there was going to be 20 or 15 or 30 Democrats were going to lose. >> It was sounding quite dismal people's projections. >> And now, look, I was I was concerned about too. I was I was like, I just got here. I'm gonna lose my job.

Like I get here and I lose all these Democrats on this bill. But in reality, what ended up happening is like at the end of the day, you're talking about 50 million Americans who own crypto, $3.7 trillion of value in the crypto space that is regulated in all sorts of different manners. And once you make those points clear to members of Congress, it becomes very clear to them why there is a need to do this seriously. And it doesn't matter who the president is. It doesn't matter who is in office when it comes time to protect the American people and to make sure that there's a clear regulatory framework in this type of space. So as we were able to make that clear to members, they were able to become more comfortable really voting on this on the

merits of the bill. And when you mentioned earlier the question of winners and losers, one thing I would say for winners on this is is House Democrats quite frankly because there had been concerns that Democrats whether or not they can ever get across the line when it comes to being willing to fairly and reasonably consider crypto policy and legislation. And what we've seen is a resounding yes. We won almost half of Democrats. We won the majority of House Democratic leadership on Clarity Act despite the concerns we mentioned. It picked up votes versus fit 21. So, I'm really excited to be working with House Democrats on that.

>> Excellent. Ben, anything to add to that? >> Yeah. No, I think Michael hit the the nail on the head there. Momentum is really important in lawmaking. And if in the House only, you know, 30 or 40 Democrats supported the Clarity Act as it's going over to the Senate, your momentum is significantly diminished. and putting up a massive number like like 78, a number that was higher than FIT 21 a year ago, even in the wake of of all of the questions on the Democratic side about conflicts of interest, is a a massive massive tool that will bring the momentum that I think the Senate needs to to act quickly and, you know, hopefully to keep the really important pieces of of clarity intact throughout their process. Okay.

So, concluding question, what happens next? Both for Genius and for clarity. >> Yeah. So, the Genius Act was just signed into law by President Trump. In fact, Ben Horowitz was in attendance for that bill signing. So, that bill is now now the law of the land. And then for clarity, the bill will will go over to the Senate. The Senate leaders are are pinpointing September for action both in committee and and on the floor. And so if if they're able to hold to that, they may make some minor amendments to the bill, bring it forward for a floor vote by the end of September, at which point they'll then send it back to the House if they do make those amendments, and then theoretically the House would pass the bill as is and send it to the

president for a signature. >> What happens if clarity does not get passed? >> Well, look, I think one of the things that people should be mindful of here, right, is, you know, okay, crypto got a bill, like can we move our attention to other things? Not so fast. At the end of the day, if anything, the urgency behind clarity and getting market structure done is even more important now because we just passed a regulatory framework for how we can issue stable coins, bring them on chain. We do not have a regulatory framework for the underlying infrastructure for the blockchains themselves. That's what market structure does. So, you know, if you're talking about trillions of dollars moving on chain, which is what predictions so, that's a pretty scary prospect if you don't have a regulatory framework for the underlying blockchains. So, I think

the time is now. It needs to happen and there's there's really no other option. We're going to move forward. We're going to push for market structure legislation and failure is not an option. All right. Well, thank you all for joining and sharing some insight about what was going on behind the scenes with these bills passing and some of them getting signed into law. And I guess we will wait until September to see what happens with Clarity. But for now, the crypto industry can celebrate Genius passing into law and stable coins. I think we can expect that trend to continue to pick up speed now that there is some clarity, not the bill clarity, but some actual clarity around the rules of the road there. Miles, Ben, and Michael, thank you so much for coming on.

>> Thanks, Alex. Robert, thanks.