Is the CLARITY Act finally getting some clarity with new compromise?

Scott Melker sits down with Coinbase chief legal officer Paul Grewal to discuss a wide array of crypto-related stories, including the latest updates on the Senate's CLARITY Act for stablecoin regulation, state lawsuits against prediction markets, and the adoption of tokenized assets.

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The Clarity Act is heading for markup, and the turf war over prediction markets is also heating up. We're going to talk about that and more live here from Consensus in Miami Beach. Let's go.

What is up everybody? Welcome to the Daily Wolf on Yahoo Finance. I'm your host Scott Melker, also known as the Wolf of All Streets. And we're doing something a little bit different today. Usually you get me ranting and raving for 15 minutes about the news of the day, trying to separate the signal from the noise. Today, I have a partner to rant and rave about everything that's happening in this industry. I've got Paul Grewal here, the CLO of Coinbase. You have got to be the busiest man in this industry.

Definitely have a few things going on, but it's always great to chat, Scott.

So you kind of joked when we were talking that uh 5:00 p.m. can be a very different landscape than 8:00 a.m. It seems like the Clarity Act is probably a great example of that. So, in the words of Brian Armstrong, mark it up, right? Uh it's time we got the deal between also Brooks and Tillis and it seems like we're ready to move forward on this thing. What what are your thoughts?

Well, my first thought is it's always a pleasure to work for someone who chooses his words carefully. And I think Brian was exactly right in this instance. It's time to mark it up. Look, Scott, we've been at this now, um in some cases for years and it's very exciting that we're on finally on the on the on the on the cusp of real uh market structure legislation for the first time in the US. Um we've made tremendous progress on a number of the key issues that have kept uh uh a variety of interested parties um apart for some time. And I think it's um clear that the Senate Banking Committee, just as the Senate Ag committee before it and the House before that, understands that America needs sensible rules for crypto and the time to put those rules in place is now.

Well, when I read the reception from the world on this proposed deal, it seems like everybody hates it, which means we've got to be doing the right thing.

I think that's usually the case with compromise, especially in Washington. And it's interesting to me that everybody hates it um not only for different reasons, but often for contradictory reasons. The reality though is that this is legislation that I think is good for crypto, it's good for uh consumer and investor confidence, and it's also good for American competitiveness, which means if we focus on what matters in the end, we're going to get this thing over the hump.

So Coinbase was very much at the center of this. Obviously, we had that famous moment where people believed we were going to mark up and Brian wrote the long thread basically saying, no deal's better than a bad deal. Right? Do you think that now we're in the situation where we have a much better deal and how does this I guess impact Coinbase directly?

I do think we have a better deal, even if it's not a perfect deal. Um, you know, look, the reality is, um, Brian, um, has always been clear that um, principle will always trump uh short-term interest and Coinbase has always focused on what ultimately makes sense for the health of the industry and the health of the community. Um, we are pleased that after some initial hiccups, I think in the process, the Senate kept at it, the Banking Committee in particular, kept working to get to sensible resolution of the issues that remained in dispute, whether it's rewards, whether it's DFI, whether it's uh protecting developers. And we think we're close on this. Now, the Senate will ultimately have the final word. I think it's very important for people always remember, uh the Senate does not uh work for the industry. The industry serves the Senate as as as much as any other interest in this discussion and we're hopeful based on what we've seen so far that the final language that will go through markup and ultimately um move on to the Senate floor for a vote, uh will be the right language. Um it will be language that moves the industry forward, moves the community forward in ways that we think are very, very positive.

Let's talk about that language. So, you know, obvi- obviously it's sort of, uh the banks can keep their deposits and do bank things, and the crypto industry, I kind of like to think of it like we get crypto rewards. You know, credit card rewards. Uh but it seems like there's a massive gray area in between that that would have to probably be litigated on the ground to some degree. You know, is it a reward if you move your coins from one wallet to another wallet and hold them there?

Well, look, lawyers are going to litigate, that's what we do. But I think if you take a step back, um it's it becomes very clear that um the Senate Banking Committee and in particular Senator Tillis and Senator Alsobrook heard the concerns. They heard concerns from the crypto community that rewards might be uh at risk. They also heard concerns from the banking trades that somehow um preserving and protecting the ability to pay rewards based on um um idle yield as they called it, uh bank deposit substitutes would somehow threaten their enterprise. The reality is there's been zero evidence ever offered that uh stable coin rewards threaten banks or bank health in any way whatsoever. And yet it's important that, you know, compromise ultimately be reached in order to move ahead. And so I think um that that's what Senator Tillis and Senator Alsobrook had done. Candidly Scott, I'm a little confused as to why the banks can't take yes for an answer. They got what they want. The reality is that the law of the land today is genius and under genius, all rewards by intermediaries, not just including Coinbase, but but many others, are fair game. And so now with this draft language that we've seen, there will be um changes to that structure. So they won. They got what they wanted. And yet they seem to be snatching defeat from the jaws of victory.

I find that so interesting because this definitively extended the prohibitions from the Genius Act. Right, it was just the issuers at that time. So if you were Circle, obviously, you were concerned or or anyone else issuing a stable point. Now it's everybody.

Correct. What is there left to fear? Well, I don't think there's anything serious left to fear. I think what this shows is that um the banking trades all along had a much broader agenda than simply addressing concerns about a non-existent risk of deposit flight. They were focused, maybe even laser focused from the very beginning on killing rewards. That didn't happen, at least under this draft language. And it's important to underscore. This is still draft language. We'll see what ultimately comes out of the process. But by um picking up their marbles and and essentially going home and claiming that somehow there's still work to be done. Um I think what they're showing us all is they never were interested in forging a a reasonable compromise here or addressing legitimate concerns, they simply wanted to take rewards out of crypto entirely.

Yeah, so before we move on from this topic, what do you see as the next big debate or stumbling blocks potentially for the Clarity Act because this is one piece of many, it's been the one that everybody's been focused on, but certainly not the only one.

Well, I'm very hopeful that uh we will reach a compromise on the uh on the other issues that remain in play. As I mentioned earlier, um there still is work to be done on developer protections. There still is work to be done on making sure that DFI is protected, which has always been a primary goal and an essential goal for us. Um and and frankly, there also is work that remains to be done to make sure that the SEC's uh flexibility and discretion um to protect, you know, new initiatives like tokenization of assets, um remains remains intact. So, I think there is work outstanding, but I'm very hopeful that that work will ultimately land in the right place.

Moving on to the next topic or where there's work outstanding, prediction markets, right? Uh there was this curious moment last week where they or maybe it was two weeks ago now, they New York AG, I would say singled out Gemini and Coinbase for illegal gambling in the form of prediction markets, curiously did not go after everybody else. You immediately had that sent to federal court, but I think that we have a turf war clearly between the CFTC seemingly and the states. And you've been right in the middle of it.

We have been. Um and yet in many ways, Scott, this is uh a movie that we've seen before. Certainly, I think our experience with the Genzler regime and under the previous administration has informed our view that sometimes uh there is a time to talk, sometimes there is a time to negotiate, and sometimes it's just a time to stand and fight. And I think prediction markets are in one of those moments where you see state regulators and certain state attorneys general all over the country, um trying to grab power, trying to grab authority that the law doesn't give them. Congress was very clear when they amended the commodities exchange act and adopted a very broad definition of swaps that this was a an issue for the CFTC and the CFTC alone. And if that weren't clear from from the plain language that I referenced, uh it was made even more clear when they added additional language that said this is exclusive jurisdiction of the CFTC. So