"Hot Takes": A Robust, Lively Discussion on the Digital Finance Industry's Most Controversial, Urgent and Regulatory Issues

Introduction: Holly Sraeel, SVP, Strategy and Content, American Banker Live Media

Transcription:

Jason Henrichs (00:12):

Else. Thank you for those who stuck around, I guess. So this is your explicit content warning. If you have sensitive ears or young children with you, you might want to exit now. When we were brainstorming for this and Holly said, spice things up, I'm like, when you say spice, how spicy can we go? We're going probably about as spicy as I've ever gone with this. Who remembers children of the nineties, when you would play the game, the acronym is FMK? I've said this to people, they're like, I can only think of one thing, where you had to pick someone for the F, someone to marry, and someone to kill. I'm like, yeah, that's what we're doing, but FinTech edition. So let's hit the ground running. FMK, let's talk regulatory bodies. You get to marry one, kill one, and sleep with one, Dara.

Dara Tarkowski (01:05):

Well, what a loaded question to ask the lawyer first question out. Complex, because these are dynamic agencies with dynamic changes that are happening, and sometimes you've got to figure out whether or not they're going to F you before you kill them. In my role, I'm constantly figuring out who's going to try to do that to my clients. So I would say that if they're not giving you a ring and they're only trying to f, you should probably kill them. And that may or may not be something that the executive branch is trying to do at the small agency called the Consumer Financial Protection Bureau. Just saying.

Jason Henrichs (01:50):

Just say, Alex.

Alex Johnson (01:52):

Oh gosh. Well, first of all, that was a great lawyer answer. It was hilarious, but you also didn't answer the question.

Dara Tarkowski (01:58):

I'm so good at that. I'm so good at it.

Alex Johnson (01:59):

Did anyone else notice that that was a really artful dodge? I'll go first and then we'll come back to you. Okay, so MFK. Well, I want to marry the CFPB. Not so much because I love absolutely everything that they've been doing, but in the sort of green card fashion, I don't want them to disappear. So,

Dara Tarkowski (02:17):

I thought you wanted half their assets.

Alex Johnson (02:18):

Yeah, well, that too. No, no, I don't think that's it. I think from a kill perspective, there's a big focus right now on reducing regulatory overlap. Do we need the NCUA for credit unions? That feels a little bit redundant to ones we already have. I also, speaking as someone who does reporting on this space, wasn't wild about them getting rid of the requirement to collect data on overdraft fees collected by credit unions. We had that data briefly, now that data is gone. So they would probably be my K. And then F, I don't know, maybe the OCC because they're very open for new FinTech charters. I feel like that maybe is a good fit.

Jason Henrichs (03:00):

I like that. I can buy that. I'm surprised you went with CFPB though.

Alex Johnson (03:07):

For Marry?

Jason Henrichs (03:08):

For Marry.

Alex Johnson (03:08):

Yeah.

Jason Henrichs (03:09):

Very surprised, because as an agency, it feels like they came out of the gate all wrong. Let's talk more broadly.

Dara Tarkowski (03:18):

Like 2010, all wrong.

Jason Henrichs (03:20):

All wrong. Came in hot. This is my problem with it. And I think the mission is warranted and needed. Warranted, pun intended. But I feel like of all the agencies, they came out political from the very outset. We've never recovered.

Dara Tarkowski (03:39):

Well, that was by design. That was the structure of the agency instead of a three-member commission. You've got a very politicized director appointee position that, as we've seen play out over the past decade plus, it's just Charlie Brown and Lucy in a football. You just never know who's who in that delightful trifecta.

Jason Henrichs (04:01):

Well, and so I think that brings us to, let's start talking about one of the biggest implications right now is what is going to happen with the CFPB? Talking about Lucy, Charlie Brown in the football, right now we're not even playing, the ball's in the court anymore.

Alex Johnson (04:20):

Go ahead.

Dara Tarkowski (04:21):

What's going to happen with them? Well, to the extent that anybody still works there, they've made their priorities or lack of priorities pretty clear. They don't want to touch data. I know we're going to talk about 1033 later, so I don't want to jump the gun there. But what's going to happen with them is they're going to be completely neutered until the next administration. Depending on what the next executive branch is going to look like, maybe they'll stay neutered, or they'll get neutered, or there'll be a different directive from a different guy sitting in the Oval Office. We can all sit there and hope and pray that Congress does something because that's the only way. And by the way, the CFPB has now come out and said this publicly it's only going to be an act of Congress that's going to change anything with regards to any actual legislation. Rulemaking could talk about LO or bright all day, but the agencies aren't given any deference anymore. So I think that they're lacking some purpose right now, but they want to protect military vets. They've said so, we know at least for the next three years they will be doing that.

Alex Johnson (05:31):

Yeah, I mean it feels a lot like they are trying to make a larger philosophical point about what a world without the CFPB looks like. I suppose it's too early to say exactly what the implication of a lack of federal focus on consumer financial protection will look like long term and what the impacts will be. As you said, they've carved out a few things like military veterans where they're still focused, but for the most part, it's a lot of just indiscriminate rolling back of rules, canceling enforcement actions, canceling active supervision, stripping back a lot of resources. One of the things we were talking about backstage is the idea that this isn't going to in any way change the obligations of anyone in this room from a consumer protection standpoint. We still have consumer protection laws on the books. We still have 50 different states that all have different approaches to consumer protection. So it doesn't really materially change the facts on the ground, but I think the message it sends to the market might be something worth monitoring.

Jason Henrichs (06:29):

Message it sends is very interesting, but I think it makes it messier. And that's the problem. This is not active deregulation as much as we want to claim that, because does anyone think having 50 different state-based approaches to go do this is deregulated? No, it's actually more complicated to do anything of substance.

Dara Tarkowski (06:52):

150% agree. If we want to turn the clock back to 2010, for example, a lot of non-bank financial institutions and even some banking institutions, they don't want a patch. They don't want patchwork regulation. They want some consistency. It shouldn't be 50 state regulatory. That was always the struggle, especially for companies coming from abroad wanting to deploy product in the United States and do business in the United States. They spend all of this time and money trying to create certain regulations for non-bank financial services companies. Reg F was a wonderful example. Then you spend 10 years waiting for a rule, and then you're like, oh, you told me that I could have one set of rules, but I really don't like the set of rules you gave me. So can I have the other 50 state thing again? And then they're going to hate that too.

Jason Henrichs (07:45):

Brandon, if you're listening, it was Dara who said the patchwork problem, not me, when this plays on Breaking Banks.

Alex Johnson (07:52):

Yeah, labs of innovation. That's what I said. So all about 50 states.

Jason Henrichs (07:56):

These are the views of the participants, not Jason as the host. Well, I mean, let's talk about 1033. If you do not follow Dara on LinkedIn, she wrote an exceptional piece, maybe the best thing she's ever put out today on the dysfunction within the CFPB.

Dara Tarkowski (08:16):

Well, so what was fascinating to me about 1033, which was the open banking rule, and I say open banking, little o, little b, because it's not big O, big B we have in the UK and other parts of the world. And it's not the first time an agency has tried to pull back or repeal a rule. So that concept was not novel in and of itself. But for those that hadn't been following, there was litigation that was filed in the district court of Kentucky by a banking association and a bank within the jurisdiction against the CFPB, essentially trying to invalidate the rules under section 1033. When I say rules, I refer to them very, very loosely. I always called it more like a mandate rather than an actual workable rule framework. So this is going on for years and years. Financial institutions are deploying millions of dollars, capital, time, labor, brain power into infrastructure, building the rails.

(09:18):

How are we going to get this data permissioned? How are we going to keep it secure, so on and so forth. On the flip side, you have FinTechs who are building entire business models around the availability of 1033, and it's going to be this golden age of data sharing, and we're finally going to catch up to Europe, and we're so cool finally. And then the CFPB says, oh, we agree with the plaintiffs. Rather than doing it quietly, settling it, and then quietly doing their administrative rollback behind closed doors in DC, they decided to file a summary judgment brief with 20 plus pages of reasons. And this is the part that's fascinating reasons why the first go-round with the bureau, all the different ways they screwed up. It was a substantive issue, it was an interpretation issue, it was an authority issue, and that part is really unprecedented. Normally, you do your dirt much more carefully and secretive, but I think they were trying to make a point. I think they're looking for a court order. Because of that, it is going to be much more difficult to put together a proper open banking framework, and we're back to market-driven solutions. It's just control Z. We're just back.

Jason Henrichs (10:38):

And can we put the genie back in the bottle? Because to me it feels like so much investment is gone on out there and there are so many people who've really begun to enjoy the benefits of data and data sharing, and those who do it well, that the market's going to pick up and run with it, is what it feels like again.

Alex Johnson (10:58):

Yeah, the thing that happens when an open banking data connection breaks is the bank or credit union gets calls from their customers or members saying, what the hell? That's the number one thing that happens. Lots of stakeholders benefit from open banking. You could argue that FinTech companies benefit more than banks. A big thing that banks wanted when they filed the lawsuit was the ability to charge for access to the data, which I don't think is necessarily unreasonable. That's something that I think could have gotten argued out and maybe figured out if the rule wasn't getting vacated entirely. But the reality is, at the end of the day, consumers want this, right? Consumers are used to it. They count on it. The ability for consumers to get access to their data and to share their data was enshrined in Dodd-Frank. Again, you can argue about the interpretation of that, but I think banks that ignore the essential reality that data is portable. You don't just have captive customers the way that you used to, and you have to adjust to the competitive environment that you're operating in. You can't rewind the clock. To your point, I mean, we can reset the regulatory environment, which we're apparently doing, and that will create a lot of bad behavior and bad outcomes coming out of that. But I don't think that you can reset consumer expectations. I don't think you can reset competitive dynamics. Plaid and these other large data aggregators exist. There are these massively successful and entrenched FinTech businesses and FinTech business models that are built on top of this capability. It's going to exist whether we want it to or not. So the question is, do you want to have a strong regulatory framework in place to govern all of the participants' actions in this new world, or do you want it to be the wild west? And we seem to be going towards Wild West.

Jason Henrichs (12:39):

I like Wild West, a lot more fun. Well, it makes for better podcasts panels.

Alex Johnson (12:43):

It does. I mean it's great for content. This is fantastic for me. I

Dara Tarkowski (12:46):

Mean, it's going to help put all three of my kids through college. So that's where it's at for me right now. But honestly, it's just dumb. It is just dumb, mostly because now you're going to have the situation where consumers, depending on the financial institutions that they work with, are going to have such disparate experiences. The whole goal of standardization and consumer permissioning and empowering the consumer to control their data, there's just going to be so much more legwork on behalf of an unsophisticated consumer—that's a legal standard, that's not my word—to figure that out. Whereas it didn't have to be that way. We were trying to create more opportunities and more offerings and to level the playing field. But forget about the wild West. I think it's a clear message like, no, we don't want to level playing field. We don't want that.

Alex Johnson (13:40):

I think to that point,

Dara Tarkowski (13:41):

By we, I mean Russell Voce and the government and Donald Trump and all those people.

Alex Johnson (13:45):

Well, I think there's also a huge difference in terms of banks of different sizes. I think that this revocation of the rule, or vacating of the rule, it benefits banks if you're big enough, because if you have enough scale and enough negotiating leverage and enough first-party data, open banking is probably more of a threat than it is a benefit to you. You have a lot of negotiating leverage to sit down and have bilateral agreements with every one of the data aggregators, and you can get your way. You might be able to negotiate commercial terms to get some of that revenue. But that's not going to benefit regional banks. That's not going to benefit community banks. That's not going to benefit pretty much any credit union. The nice thing about the rule was it level set for the whole industry, rather than creating winners and losers based on size and negotiating coverage.

Dara Tarkowski (14:31):

It's so funny that you use the phrase winners and losers because one of the other things that we were chatting about is, sometimes we feel like this large pendulum swing is just because they feel, when I say they, I mean a certain party or group of people, who are feeling like they need to be the anti-Chopra or whatever it is. The pendulum is swinging hard the other way, and they might on paper, in their enforcement by summary judgment—that's going to be my new phrase, by the way, before it was enforcement by regulation, now it's enforcement by summary judgment. They're doing that because they want the W. They just want to win, and they just want to undo things that the previous administration, but more importantly, director Chopra did. For some, that is reason enough, even though that is so not the thing that anyone should be focused on.

Jason Henrichs (15:18):

Well, especially when we talk about the pendulum will swing again, and it feels like the further we go one way, when we swing back to the other side, the gyrations and gestations are making it work. I don't know any bank regulated entity right now that goes, sweet, CFPB is gutted, they shut off the lights on the way out. Let's just go change all of our behaviors, and next administration, right? There will be a change at some point. They're just going to say, Hey, whatever you did in the Wild West era, good on you.

Alex Johnson (15:49):

Well, and I think the real problem is that some banks and even larger FinTech companies are going to be cautious over the next four years. They're not going to go crazy just because the CFPB isn't as active as it used to be. They'll still have to deal with the states. They'll still be thinking about, well, we could get in trouble now, four years from now, for a thing that we're doing, so maybe we shouldn't do that thing. They will be prudent in the way that banks and large companies are. The concern is startups and innovators and 22-year-olds who don't know any better. They're going to do whatever they're allowed to do within this environment over the next four years. Where you tend to have problems, if we think about the companies that have screwed stuff up for everyone else, it's Synapse, it's FTX. For the most part, it's these sort of up-and-coming, very young companies that don't know any better and that have an incentive to take risks. If you're allowed to take risks, what they don't realize or what they don't care about is they're taking risks on behalf of the entire ecosystem, not just themselves. That's what engenders the pendulum swinging back and bulldozing good companies that were trying to act in a prudent way. But,

Dara Tarkowski (16:57):

If that's going to happen, which, and look, we've seen a few different parties in office since the establishment of the agency. I think we could all agree that based on what happened under Director Kraninger and Trump 1.0, I still don't think anyone anticipated it would be as wacky as it is now. I didn't. I knew it was going to be weird, but I definitely didn't anticipate this. But if that is what it's going to be, and it's going to be this game of political ping-pong, to me, that's why you kill and don't marry.

Alex Johnson (17:34):

Right.

Dara Tarkowski (17:34):

That's a difficult marriage to be in.

Alex Johnson (17:37):

No, it is. I think that the thing I keep coming back to with the CFPB is culture. You talked about this in terms of them getting off to a hot start. The challenge with the CFPB relative to other agencies is they are really young. They're not even 20 years old, they're 12, 13 years old. That is really young compared to the OCC, which was founded during the Civil War. At the OCC, there's a culture and a DNA of, we do certain things, we don't do other things, and it sort of guides their actions and creates some consistency administration to administration. The CFPB doesn't have that. My observation, kind of going to your point about Kraninger, is the pendulum seems to be swinging more aggressively each time, right? Like Cordray to Kraninger was a change, but it wasn't actually maybe as much of a change as people thought it would be. If you talk to people at the CFPB, they would say they actually for the most part didn't mind going from Cordray to Kraninger. But Kraninger to Chopra was a big swing in one direction. The thing that's happening now with acting director Voce is a swing back in the other direction. To your point, I can't imagine we won't swing really hard back the other way. Four years from now, you're going to hear a lot of things that you used to hear around any new innovation, and lending is payday lending. We don't care what you say. Everything is predatory by default, and that's not good for innovation.

Dara Tarkowski (18:58):

Well, so what I just took away from what Alex just said is that the CFPB is going through its angsty teenage years and is having very large hormonal swings. We are seeing that play out in real life to the tunes of bajillions of dollars that people are spending or losing or not spending or not innovating because they don't know how they feel when they're going to wake up after they have their Cheerios in the morning.

Alex Johnson (19:27):

Anyone with teenagers would understand your analogy

Dara Tarkowski (19:29):

Perfectly. Yeah, yeah. I got one who's about to turn 15, so it's really on my mind right now.

Jason Henrichs (19:35):

Well, and back to the 1033 piece of this, it really does feel like it opens up a big hole for dangerous things to take place. That it is the next wave of fraud, just like we had with authorized push payments, that could really bite the industry in the butt at the end of the day without the standardization.

Alex Johnson (19:54):

Yeah, I mean, so one of the things that banks were really concerned about with open banking was a lack of guidance or guardrails around third-party risk management. Are we allowed to kick out a FinTech company from accessing our data if we deem them to be risky for some reason? Liability. If something goes wrong with the customer sharing their data, who's on the hook for that? There was a lot of that that really wasn't well spelled out in the rule, kind of going to your point about a mandate versus actual set of rules. However, it did move us closer to having a framework that would help govern and control some of those risks. It wasn't perfect. I would've liked to have seen the rule rewritten or restructured in a way that addressed some of those concerns. The problem is by throwing out that rule entirely, again, we're going to the wild west.

(20:38):

What is going to happen in this environment? Well, one of the things I'm sure is going to happen is we are going to see a profusion of fraudulent and sketchy FinTech apps or FinTech looking apps that convince consumers to credential their data. It's not going to happen via APIs. The APIs will be a little bit more rare, but it's also a lot easier to build screen scraping technology than it was 10 years ago. Now we have generative AI, so now anyone can spin up a screen scraper, can scrape a bank's website, can collect consumer's credentials by tricking them into handing them over, and then can do bad things with access to that customer's account. Those scams are going to happen. In the same way that when Zelle and P2P payments really took off in the US, we saw a huge surge in payment scams. We're going to see open banking scams in the US, and we would've been much better able to fight those scams and to manage those if we had a framework and we had APIs and we had these trusted choke points where we could try to evaluate those risks and manage them. Without that, we're not going to have it.

Here's the key point:

Banks think, oh, well we didn't give them the data. You gave them the data. That's your fault, not ours. Tell me how that worked out with Reg E and Zelle. It doesn't work when your customers get hurt, even if it's through their own negligence. You go, sorry, that's not my problem. Rules will get rewritten. Regulators will take a tough stance against you. Legislators like Elizabeth Warren will get involved. The New York Times will do exposes talking about how badly you're treating your customers. It will come back to bite you, whether it's technically, legally something you're liable for or not.

Dara Tarkowski (22:11):

By the way, even when there isn't a rule, it can still be a UDAAP, and all of the states can enforce UDAAP. So we're exactly where nobody wanted to be, except for those who didn't want to ever permission or share any data, and they will sort of go back and retreat to their data fortresses and quietly declare victory because they can't say it too loud because then they're not cool.

Jason Henrichs (22:36):

You mean the biggest of the banks that don't want to share because they're an ecosystem unto themselves?

Alex Johnson (22:41):

And they're not using the data they have. That's the other thing that drives me crazy about this. It's not like these big banks were doing all kinds of amazing, innovative things with all the first-party data that they have. They're not doing anything with it. It sits in a data lake and doesn't do anything. It's

Dara Tarkowski (22:54):

Their ball.

Dara Tarkowski (22:55):

It's their ball. And only they're allowed to play with their ball when they want to play with their ball, and you may not play with their ball.

Alex Johnson (23:00):

You have toddlers too, don't you?

Dara Tarkowski (23:02):

I don't. God bite your tongue.

Alex Johnson (23:04):

I just flashed right back to my life when you said that. Yeah.

Jason Henrichs (23:08):

Well, let's move on a little bit to another FMK stablecoins.

Dara Tarkowski (23:17):

What's a stablecoin?

Jason Henrichs (23:19):

I don't know. There's two pieces of legislation working their way through Congress right now, and no one wants to define what a stablecoin is.

Dara Tarkowski (23:25):

Yes, two bills on the floor and no definition about what a stablecoin is. We know what it's not, though. It's

Alex Johnson (23:29):

Not a deposit, it's

Dara Tarkowski (23:30):

Not a security.

Alex Johnson (23:33):

Not money, right?

Dara Tarkowski (23:34):

It's also not, nope, not money.

Alex Johnson (23:37):

I don't know what it is.

Dara Tarkowski (23:38):

I don't know what it is either. You know who else doesn't know? Any of the lawmakers who wrote the bills or Congress or a banking agency to be named in the future who may or may not be overseeing this particular type of thing that we can't define or name, but we know what it's not.

Jason Henrichs (23:52):

If we could get you any more wound up, do you want to do a brief synopsis of the Stable versus Genius?

Dara Tarkowski (24:02):

Sure. So for those of you who have not been following the stablecoin congressional drama, there are two competing bills on the floor of Congress right now. Interesting how, sorry, I'm going to circle it back to 1033 for just two hot seconds, because none of these things really exist in a vacuum, and watching the decisions that are being made on the legislative front, I actually think is quite telling. There is the Genius Act versus the Stable Act. Both of these bills are currently in various stages of coming out of committee but are alive and well. I imagine at some point in the future they will all be Frankenstein together to get one other very diluted piece of legislation that will also lack a definition. But putting that to the side for a second, essentially both the House Stable Act and the Senate's Genius Act—that's where they are—would create what they claim is a comprehensive regulatory framework for stablecoin issuers, including licensing requirements, reserve standards, AML obligations, and some consumer protection. There are a number of states already that have licensing requirements for this, and many of whom are trying to scooch some passage of those licensing regimes under the gun before this has passed. There's good reason, because it's not just going to be the federal government overseeing all of it. It's going to depend on the size of your organization and how much your organization is worth, whether you're in the state world of regulation of stablecoins or the federal world of regulation of stablecoins.
There's going to have to be, under both bills, a one-to-one backing of coin to fiat to the US dollar, so that's the same. There is going to be a prohibition on interest payments to stablecoin holders. There are very similar custody and consumer protection standards. Essentially, both bills are going to amend the federal securities laws to clarify that payment stablecoins issued by permitted issuers will not be classified as securities. So they do not want it to take the direction that the other crypto assets took under Gensler and others under the Securities Exchange Commission. Now, the Stable Act, which, if anyone's asking my personal opinion, is the weaker of the two bills. I don't like either of them, but I like Genius better than I like Stable. Under Stable, it is actually making it open to foreign issuers, whereas under the Genius Act, it would be domestic only.

Alex Johnson (26:32):

This is the Tether problem.

Dara Tarkowski (26:34):

What's the Tether problem, Alex? Tell me more about that.

Alex Johnson (26:38):

So the largest stablecoin issuer in the world is issued by Tether, USDT. To put it politely, Tether has not always been super transparent about how it complies with some of those requirements around AML and other things that you mentioned, or necessarily even transparent into where all of their reserves are kept, or what type of assets they're kept in. They are the favorite stablecoin of criminals internationally. A lot of growth that they've seen over the last couple of years has been based on a fleeing away from more heavily regulated stablecoins like USDC in the US. So the discussion about whether to fold Tether into the regulatory perimeter or to keep it excluded from the regulatory perimeter is one of the big issues on Capitol Hill right now.

Dara Tarkowski (27:29):

Issues. That's a very generous,

Alex Johnson (27:32):

I know.

Dara Tarkowski (27:33):

That's a very generous word. To really just break it down, the main difference between the two bills is exactly what Alex just said, but also the way it would work from, if I'm a brand-new issuer and of a certain size, and I get licensed by a certain state. Under the Genius Act, there is a certain threshold that once you are doing this much in payments and transfers, you must, there's a mandate that you must transition into federal oversight, versus the Stable Act, where there isn't. They were like, nah, if you're comfy with your state, you can stay there. We're cool. Which begs the question again what's the point? You can't give me a definition, you're curious about. We don't know which regulator you're going to hang out with. But if you start here and you want to stay there, you can just stay there. That's bizarre to me. It's completely bizarre to me.

Jason Henrichs (28:29):

Alex, what's your favorite stablecoin use case?

Alex Johnson (28:33):

Well, the only one I can really point to is cross-border payments. So I took that one. So that one's mine. You guys can't have that one. You have to pick a different favorite stablecoin use case. Yeah, I mean it's hard, right? If you ask what can stablecoins do that's unique among all the other options that we have today, the only two things that really come up are one, it makes it faster to essentially build the infrastructure for cross-border payments, or for money to move across borders. It doesn't solve every problem. You still have the last mile on either end where you have to do offboarding into fiat, you have to deal with AML and KYC and other regulations in whatever countries you're operating in. The other one is, as the name suggests, it's a stable place for people living in other countries with less stable currencies to keep their money. If you live in Argentina or Venezuela or a country that doesn't have that same sort of stable monetary regime, it's a benefit potentially for them. I think if you're asking more from a policy perspective, what's the argument for it? I think the three that I've heard brought up the most are one, it creates more demand for US treasuries, potentially useful. Two, it actually potentially makes AML/KYC, some of those things easier strictly in terms of being able to track things and have an immutable ledger that you can rely on. So from a data perspective, it's good. And then the third one that I'd like to get your take on is it does create kind of a more permissionless platform for building things on. I think about this in comparison to banking as a service. In the early days of banking as a service, the companies that tended to win, whether they were banks or middleware platforms, were the ones that created a really flexible sandbox where you could kind of do whatever you wanted. As FinTech companies and their sponsor banks got in trouble because of that excessive amount of freedom, BaaS became a little bit more regulated, it became harder to build, it was a little slower, banks were more careful. That was the natural regulatory reaction. Stablecoins, I think, are seen as kind of a better alternative to the way that BaaS works today where, hey, I can just go to Stripe. They have the ability to store money, to facilitate payments, it can move across borders. Why don't I just build on that? Now that we are going to have a regulatory structure that clears up some of these compliance questions that have existed around stablecoins, now it's a much more viable alternative to building on top of banks. If you ask what the policy trade-off is, it's competition versus continuing to keep deposits and business at banks.

Dara Tarkowski (31:10):

Oh, well, by the way, you mentioned one thing, you talked about Stripe and other traditional money transmitters. Fun feature about both of these bills is that if the stablecoins are ancillary to your primary business, like let's say you're already a money transmitter, you don't have to worry about getting licensed at all because you're already a money transmitter and you don't have to worry about it. Combine that with the Department of Justice eliminating their digital assets task force, the whole thing feels like a recipe. All of those things individually may not be a big deal, but I think looking at all of those factors together goes back to exactly what Alex said. Yeah, crime.

Alex Johnson (31:47):

Well, I think the other part of that that's really important to note is that unlike banks that have very neat processes and mechanisms in place to deal with bank failures, where we can take banks into receivership, we can manage that, there's a trustee that gets appointed and they can oversee the transfer of assets. All of that is really well tested, pressure tested in terms of mechanisms. None of that exists or necessarily has been really well thought out by this legislation. To give one example, in the Genius Act, they actually require that stablecoin token holders get paid out in bankruptcy ahead of anyone else. The intention there is good, we want to put them at the front of the line. The thing they didn't think about is you actually want to have the trustee for the bankruptcy be first in line, and then have all of the holders be second. Because if the trustee can't get paid, the trustee won't take the job to manage the bankruptcy process. So there's little problems with the legislation as currently written. We might see it amended that make it really dangerous if there's any failures, which to your earlier point, seems like a strong possibility.

Dara Tarkowski (32:51):

Then fast forward three years and there's an administration change, we have a new attorney general and a new head of DOJ, and then the grand jury subpoenas start flying. We all know that FIs were receiving grand jury subpoena after grand jury subpoena. Every single bank who touched a crypto client, a trust, an asset, whatsoever, were being flooded and inundated by this. Even if it doesn't happen today, tomorrow, it is. I mean, we've seen it play out. It absolutely is going to happen, and it's going to be, I think, even harder to manage and track. All I want is a definition, why can't they give us a definition?

Jason Henrichs (33:30):

So if you're an FI, how do you start to think about stablecoins? What would you do given where we are today? Touch it? Don't touch it?

Alex Johnson (33:40):

I mean, I guess my opinion would be that it depends on what your natural competitive advantages are. I think banks are allowed to issue stablecoins, right? Under the legislation. If you're a bank, you have sort of a fast track to be able to issue your own stablecoin if you want. So issuing a stablecoin is an option. I think stablecoins are going to wind up being one of those markets where it's winner take most because a lot of utility exists when there's a single stablecoin that a lot of folks in the ecosystem use. We have actually already seen reporting that Early Warning Services and The Clearing House are talking about a bank-led consortium approach to issuing a stablecoin, which I think makes a lot of sense.

Dara Tarkowski (34:21):

Nobody on the stage knows anything about a bank-led consortium.

Alex Johnson (34:25):

Yeah, yeah. Do you know any other? Don't know anyone. Stablecoin issuers. So that would be one approach to kind of team up and issue a stablecoin. I don't think there's a lot to be gained in terms of if you're a smaller bank trying to custody reserves for stablecoins, because that's going to be a game that's naturally won by the systemically important financial institutions because they're just going to be seen as a safer place to keep reserves. So I think for me, unless you're a very, very large bank and probably already well into the planning stages, I would probably wait and see with stablecoins.

Dara Tarkowski (35:02):

Those are excellent business considerations. So I will talk about the legal considerations. At the end of the day, when you have cruddy legislation with ill-defined terms, a lack of true regulatory framework, and you still have states breathing down your neck, no one wants to define what your true North Star is. So banks need to always define their own true North Star. At the end of the day, for me, it's safety and soundness. Can I, as a financial institution or a representative of a financial institution, pass my red face test before a regulator to be named later, a court, a judge, a consumer, a customer, whoever? If you end up going back to your safety and soundness principles, as an institution, the law may not mandate you to do certain things, but you still can choose to do them and create your own policies and procedures in ways that you want to safeguard your customers. So I would say redefine your own North Star and follow that. And,

Jason Henrichs (36:00):

I think that brings us full circle to where we started. In a time of regulatory uncertainty, I think there is a certain amount of self-regulation that financial institutions need to bring to this. I like how you described it as that north star. Now, unfortunately, what we do know is regulation is most often used by, as you had said in your article today, it is needed for those who have problems regulating themselves, as why we create regulation in the first place. I worry in a gutting of the CFPB and influx of those, that I think one thing I would strongly disagree with that you had said earlier, Alex, about innovators who don't know. I think many of them do know.

Alex Johnson (36:44):

I think. So.

Jason Henrichs (36:45):

They're just willing to and choose differently, be morally flexible.

Alex Johnson (36:47):

Well, it's kind of conveniently, oh, I forgot about that thing. Yeah, no, I agree with you. And I think the other thing that regulation does when it's done well is it solves coordination problems. It's not just about policing bad behavior. Sometimes the industry can think, oh, we can police ourselves. It's going to be fine. But the other thing is there are just coordination problems that are really hard to solve individually. No one's incentives are totally aligned. That goes back to open banking and 1033. It benefits from a common set of standards. The thing I worry about is in the absence of agencies that are empowered and have the resources, quite frankly, to do rulemaking, which is an intensive process, we'll lose out on that industry coordination.

Dara Tarkowski (37:29):

Already losing. Europe and Australia and a lot of other places in the world who are literally, I think what, the UK has had a very fulsome open banking framework since Big O, big B, since what, 2018? The Financial Conduct Authority figured it out really, really well. Worked in true sandboxes with a lot of the companies that they regulate and oversee in a much more collaborative way. We're still contemplating our navels. It's a little, it's sad and dumb. It's sad and dumb. That's my hot take.

Jason Henrichs (38:06):

Is that a legal term? Yeah. Dumb.

Dara Tarkowski (38:07):

Yeah. Sad and dumb.

Jason Henrichs (38:09):

Well, that brings us full circle. Thank you for those who stuck it out with us. We aren't going to do Q and A now because of timing, but you can find us, because imagine if we're this fired up on stage. Give us a couple of cocktails and we'll really get going.

Dara Tarkowski (38:23):

Yeah.

Jason Henrichs (38:24):

Thank you, everyone.

Dara Tarkowski (38:25):

Thank you.