Coinbase Considers Withdrawal of Support for Crypto Market Structure Bill Ahead of January 15 Deadline

As the January 15 markup for the crypto market structure bill, known as the CLARITY Act, approaches, reports indicate that Coinbase (COIN) may be rethinking its support for this legislation.

Key Takeaways

Coinbase is reconsidering its support for the CLARITY Act ahead of the upcoming markup on January 15.
The company's stance depends on whether the bill includes additional restrictions on stablecoin rewards.
The outcome could significantly impact Coinbase's business model and projected revenue.
The banking sector is concerned about the effects of such rewards on traditional lending practices.
A potential compromise may limit stablecoin rewards to licensed banking entities.

This article provides insights into the ongoing developments surrounding cryptocurrency regulations and highlights the challenges faced by exchanges like Coinbase amid shifting legislative landscapes.

Coinbase

A recent report from Bloomberg notes that Coinbase’s decision hinges on whether the bill will include provisions beyond the expected enhanced disclosure requirements related to stablecoin rewards.

The Implications for Coinbase

The CLARITY Act is set to be discussed in at least one Senate committee this Thursday, and Coinbase's possible withdrawal could have a profound impact on the bill's future. A source familiar with Coinbase's perspective revealed to Bloomberg that if the legislation diverges significantly from the company's interests—particularly concerning stablecoin incentives—the exchange would reconsider its backing.

Some insiders believe the bill might limit rewards for regulated financial institutions, which aligns with concerns from the banking sector regarding potential deposit losses to crypto platforms.

Coinbase is currently pursuing a national trust charter that could allow it to offer such rewards under new regulations. However, many cryptocurrency companies are opposing these potential restrictions, arguing that they could hinder competition in the market.

The stakes for Coinbase are significant, with rewards programs being a vital part of its business model. The platform allows users to earn 3.5% rewards on their USDC holdings from Circle. If the market structure bill bans these incentives, it could lead to a decrease in users choosing to hold stablecoins on Coinbase, threatening an anticipated revenue stream of $1.3 billion projected for 2025, according to Bloomberg.

Traditional Banking vs. Cryptocurrency

The GENIUS Act, enacted in July of last year, prohibits stablecoin issuers from offering interest on token holdings. However, it does not prevent third-party partners like Coinbase from providing rewards connected to customer balances. The banking industry argues that allowing exchanges to offer such rewards could adversely affect bank deposits and, as a result, local lending.

The American Bankers Association (ABA) has raised concerns that this situation could displace "billions" from community lending, negatively impacting small businesses and families.

Conversely, Faryar Shirzad, Coinbase's chief policy officer, argues that maintaining rewards tied to stablecoins is vital for upholding the dollar's dominance, especially following China's announcement to provide interest on its digital yuan.

A potential compromise being considered would restrict the ability to offer rewards on stablecoin balances to licensed banking institutions or financial entities.

Recently, five crypto firms—Ripple, Circle, Paxos, and others—received conditional approvals from the US Office of the Comptroller of the Currency (OCC) to operate as national trust banks. This move faces opposition from traditional banking stakeholders. If restrictions are implemented, reports suggest that crypto companies may seek creative alternatives to incentivize their customers.

Coinbase The 1-D chart indicates that the exchange's stock, COIN, surged 4% on Monday, approaching $245. Source: COIN on TradingView.com

Featured image from DALL-E, chart from TradingView.com