Episode Title: FMK Hot Takes on the Regulatory Wild West
Guests: Dara Tarkowski (Tech on Reg), Alex Johnson (Fintech Takes)
Hosts: Brett King, Jason Henricks, J.P. Nichols
Event: Live from the American Bankers Digital Banking Conference, Boca Raton
What’s With the FMK Format?
JASON (Host):
Remember that game from high school or college—FMK? You’d pick three people and decide who to marry, who to, well, “spend a night with,” and who to kill off. We brought that format to the fintech world.
BRETT (Host):
This might be our spiciest episode yet. Viewer discretion advised.
Topic 1: Should the CFPB Survive, Evolve, or Die?
JASON:
Let’s start with the CFPB. Is it functional oversight or bureaucratic bloat?
DARA (Guest):
I’m killing the CFPB. It’s creating too much noise with vague enforcement threats, and the rules aren’t clear. We need a regulator that can evolve with the pace of fintech innovation.
ALEX (Guest):
I’d rather marry it—if it modernizes. We need consumer protection, but also clarity and speed.
QUOTE:
“You can’t regulate fintechs like banks. It’s a different DNA.” — Dara Tarkowski
Topic 2: Stablecoins—Flash in the Pan or Long-Term Utility?
JASON:
Stablecoins—F, M, or K?
DARA:
Marry. It’s the one area where blockchain has real institutional utility. Cross-border payments, programmability—this is the future.
ALEX:
I’d flirt, not commit. Too many regulatory uncertainties and no mass-market use case yet.
QUOTE:
“The problem with stablecoins is the ‘stable’ part—they aren’t until someone makes them so.” — Alex Johnson
Topic 3: Open Banking: Too Soon to Commit?
JASON:
How do we feel about open banking?
DARA:
It’s a long-term relationship. Marry. Consumer data rights and interoperability are essential for innovation.
ALEX:
Kill—not the concept, but the term. It’s become a catch-all buzzword that lacks clear structure in the U.S.
QUOTE:
“Open banking can’t just be open-ended. It needs guardrails.” — Jason Henricks
Regulatory Redundancy: Too Many Cooks?
What’s the Real Problem?
- Overlapping agencies with unclear mandates
- Regulatory turf wars stifling innovation
- Enforcement without guidance
J.P. (Host):
We’re in a regulatory Wild West. It’s time to streamline, not add more sheriffs.
Spiciest Hot Take
DARA:
The fintech industry doesn’t just need to be regulated—it needs regulators who understand technology, not just finance.
ALEX:
If innovation is moving at light speed, why are we using 20th-century rules?
Takeaways in Bullet Form
- FMK format applied to fintech’s regulatory chaos sparked sharp, memorable insights
- Guests clashed on the role of the CFPB, but agreed clarity is critical
- Stablecoins remain hot—but lack real traction until institutional players drive stability
- Open banking is essential but conceptually muddled in the U.S.
- Regulators need tech fluency to be effective in the modern financial ecosystem
Quotes to Remember
“You can’t regulate fintechs like banks. It’s a different DNA.” — Dara Tarkowski
“The problem with stablecoins is the ‘stable’ part.” — Alex Johnson
“Open banking can’t just be open-ended.” — Jason Henricks
“If innovation is moving at light speed, why are we using 20th-century rules?” — Alex Johnson
“We don’t need more regulation. We need better regulators.” — Dara Tarkowski
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J.P. Nichols:
Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King.
Alex Johnson:
And I’m Jason Henricks. Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns, and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future.
J.P. Nichols:
I’m J.P. Nichols, and this is Breaking Banks.
Alex Johnson:
Did you ever play the game in high school, or for those who matured maybe a little more slowly, college, maybe still playing it, where you’d pick three people? Could be politicians, actors and actresses, people you know. And well, you had to decide which one do you want to marry, which one do you kill off, and which one actually is good for a one-night stand, if you will.
So this year at American Bankers Digital Banking Conference in Boca Raton, Derek Tarkowski, host of the Tech on Reg podcast and partner at Actuate Law, Alex Johnson, host of Fintech Takes, and I, on stage went through agency, stable coins, legislation, and which do we think are worth keeping for the long term, which maybe it’s time that we’re actually done with, and which were, let’s just say, a passing fancy. This week on Breaking Banks, some of the spiciest takes yet.
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 had said, you know, spice things up.
Like when you say spice, how spicy can we go? We’re going probably about as spicy as I’ve ever gone with this. So who remembers children of the 90s when you would play the game, the acronym is FMK.
And 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:
Well, what a loaded question to ask the lawyer, first question out. Complex, right? 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.
J.P. Nichols:
All right.
Dara Tarkowski:
Which is, you know, in my role, I’m just, I’m constantly figuring out who’s going to try to do that to my clients, right? So I would say that if they’re not giving you a ring, and they’re only trying to F you, you should probably kill them. And that may or may not be something that the executive branch is trying to do with the small agency called the Consumer Financial Protection Bureau.
Just saying.
Alex Johnson:
Just saying. Alex? Oh, gosh.
Well, first of all, that was a great lawyer answer because it was hilarious, but you also didn’t answer the question.
Dara Tarkowski:
I’m so good at that. I’m so good at it.
Alex Johnson:
Did anyone else notice that? That was like 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.
Dara Tarkowski:
I thought you wanted half their assets.
Alex Johnson:
Yeah. Well, that too. No, I don’t think that’s it.
I think from a kill perspective, there’s a big focus right now on reducing sort of regulatory overlap. Do we need the NCUA for credit unions? That feels like 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.
I like that. I can buy that. I’m surprised you went with CFPB though.
For Mary. For Mary. Yeah.
Very surprised because as an agency, it feels like they came out of the gate all wrong. Let’s talk more broadly.
Dara Tarkowski:
Like 2010 all wrong? All wrong.
Alex Johnson:
Like came in hot. This is my problem with 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:
Well, that was by design. That was the structure of the agency instead of a three member commission. And you’ve got a very politicized, you know, director appointee position that as we’ve seen play out over the past decade plus, it’s just it’s Charlie Brown and Lucy in a football.
And you just never know who’s who in that delightful trifecta.
Alex Johnson:
Well, and so I think that brings us to, you know, let’s start talking about one of the biggest implications right now is what is going to happen with the CFPB? Talk about, you know, Lucy, Charlie Brown in the football right now. Like we’re not even playing like the balls in the court anymore.
Dara Tarkowski:
Oh, 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.
And like I know we’re going to talk about like 1033 later, so I don’t want to I don’t want to jump the gun there. But, you know, what’s going to happen with them is they’re going to be completely neutered for until the next administration. And depending on what the next executive branch is going to look like, maybe they’ll stay neutered or they’ll get on neutered or there’ll be a different directive from a different guy sitting in the Oval Office.
And it’ll be and we can all sit there and hope and pray that Congress does something because that’s the only way it’s like an act. 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 of actual legislation.
Rulemaking could talk about Loper 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 like that they’ve said. So we know at least for the next three years they will be doing that.
Alex Johnson:
Yeah, I mean, it feels a lot like they are trying to make a larger philosophical point about sort of what a world without the CFPB looks like. And 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 sort of active supervision, stripping back a lot of resources. And 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, right? 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.
Messages it sends is very interesting, but I think it makes it messier. And that’s the problem is this is not an act of 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 like more complicated to do anything of substance.
Dara Tarkowski:
I 150 percent agree. And 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 patchwork regulation. They want some consistency.
It shouldn’t be 50 state regulatory whack-a-mole. And that was always the struggle, especially for companies coming from abroad, wanting to deploy products in the United States and do business in the United States. And they spend all of this time and money trying to create certain regulations for non-bank financial services.
Reg F was a wonderful example. And you spend 10 years waiting for a rule. And then you’re like, oh, you told me that like I could have one set of rules, but like, oh, I really don’t like the set of rules you gave me.
So can like I have the other 50 state thing again? And then they’re going to hate that too.
Alex Johnson:
Brandon, if you’re listening, it was Dara who said the patchwork problem, not me. When this plays on breaking banks. Yeah, labs of innovation.
That’s what I said. So, you know, all about 50 states. These are the views of the participants, not Jason as the host.
Well, I mean, let’s talk about 1033, right? Like if you do not follow Dara on LinkedIn, she wrote an exceptional, exceptional piece, maybe the best thing you’ve ever put out today on the dysfunction within the CFPB.
Dara Tarkowski:
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, like 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. And when I say rules, I refer to them very, very loosely. I always called it more like a mandate rather than an actual rule framework that was workable.
So this is going on for years and years. Financial institutions are deploying millions and millions of dollars, capital, time, labor, brainpower into infrastructure, building the rails, like how are we going to get this data permission? 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 like, it’s going to be this golden age of data sharing.
And we’re finally going to catch up to Europe. And like, 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 like quietly doing their administrative rollback, you know, in behind closed doors in D.C., 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 around with the bureau, like 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, like you do your dirt, like much more carefully and secretive. But I think they were trying to make a point.
I think they’re looking for a court order. And 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 like we’ve it’s just like control Z, like we’re just we’re just back.
Alex Johnson:
And can we put the genie back in the bottle? Because to me, it feels like so much investment has 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.
Yeah, you know, 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, and that’s the number one thing that happens, right. And so there’s lots of stakeholders that 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 sort of 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? And 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. And again, you can argue about the interpretation of that. But I think banks that sort of 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 the competitive environment that you’re operating in.
You can’t rewind the clock, right, to your point. I mean, we can reset the regulatory environment, which we’re apparently doing, and that will, I think, create a lot of bad behavior and bad sort of 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. You know, 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. And 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.
I like Wild West. A lot more fun. Well, it makes for better podcasts.
Yeah, it does. I mean, it’s great for content. This is fantastic for me.
Dara Tarkowski:
I mean, it’s going to help put all three of my kids through college. So that’s kind of where it’s at for me right now. But honestly, it’s just dumb.
Like, it is just dumb. Mostly because now you’re going to have this situation where consumers, depending on the financial institutions that they work with, are going to have such disparate experiences. And like 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. On behalf of an unsophisticated consumer to figure that out, whereas it didn’t have to be that way.
And 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. Like, we don’t want that. And by we, I mean, Russell Vought and the government and Donald Trump and all those people.
Alex Johnson:
Well, and I think there’s also a huge difference in terms of banks of different sizes, right? And so I think that this revocation of the rule or vacating of the rule, it benefits banks if you’re big enough, right? Because if you have enough scale and enough negotiating leverage and enough first party data, you know, open banking is probably more of a threat than it is a benefit to you.
And 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.
And so, again, the nice thing about the rule was it level set for the whole industry rather than kind of creating winners and losers based on size and negotiating leverage.
Dara Tarkowski:
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 that 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. Like they just want to win and they just want to like undo things that the previous administration, but more importantly, Director Chopra did.
And for some, that is reason enough, even though that is so not the thing that anyone should be focused on.
Alex Johnson:
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 because I don’t know any bank or 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.
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, like 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. Like 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.
And 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, right? And 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.
And that’s what engenders the pendulum swinging back and bulldozing good companies that were trying to act in a prudent way.
Dara Tarkowski:
But if that’s going to happen, which and look, we’ve seen a few different parties in office, you know, 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. Right? Like that’s a difficult marriage to be in.
Alex Johnson:
It is. I mean, I think that the thing I kind of keep coming back to with the CFPB is culture, right? And you talked about this in terms of them getting off to a hot start.
You know, the challenge with the CFPB relative to other agencies is they are really young, right? They’re not even 20 years old, right? They’re 12, 13 years old.
That is really young compared to the OCC, which was founded during the Civil War, right? And so 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. And 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.
And 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. And the thing that’s happening now with acting direct a lot is a swing back in the other direction.
And to your point, I can’t imagine we won’t swing really hard back the other way. And four years from now, you’re going to hear a lot of things that you used to hear around like any new innovation in 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:
Well, all 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 like large hormonal swings. And we are seeing that play out in real life to the tunes of bajillions of dollars that, you know, 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:
Anyone with teenagers would understand your analogy.
Dara Tarkowski:
Yeah, I got one who’s about to turn 15. So it’s like really on my mind right now.
J.P. Nichols:
This show is brought to you by Alloy Labs. As much as we love talking on the show, we believe that action is more valuable than talk.
Alex Johnson:
Alloy Labs is the industry leader in helping fearless bankers drive exponential growth through collaboration, exclusive partnerships, and powerful network effects that give them an unfair advantage.
J.P. Nichols:
Learn more at AlloyLabs.com. Alloy Labs, banking unbound.
Alex Johnson:
Well, 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 it could really bite the industry in the butt at the end of the day, right, without the standardization. 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 have 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. 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 sort of sketchy fintech apps or fintech-looking apps that convince consumers to credential their data.
It’s not going to happen via APIs because 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, because now we have generative AI. Now anyone can spin up a screen scraper, can scrape a bank’s website, can collect consumers’ 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 have 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 sort of choke points where we could try to evaluate those risks and manage them. Without that, we’re not going to have it. And 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, right? It doesn’t work when your customers get hurt, even if it’s through their own negligence, and you go, sorry, that’s not my problem, right? 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 exposés 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:
By the way, even when there isn’t a rule, it can still be a UDAP and all of the states can enforce UDAP. So we’re exactly where nobody wanted to be, except for those who are like, who didn’t want to ever permission or share any data. And they will sort of like 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.
Alex Johnson:
You mean like the biggest of the banks that don’t want to share because they’re an ecosystem under themselves? And they’re not using the data they have. That’s the other thing that drives me crazy about this is 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.
Dara Tarkowski:
It’s their ball. 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:
You have toddlers too, don’t you?
Dara Tarkowski:
I don’t. God, bite your tongue.
Alex Johnson:
I just flashed right back to my, when you said that. Yeah. Well, let’s move on a little bit to another FMK.
Stablecoins.
Dara Tarkowski:
What’s a stablecoin?
Alex Johnson:
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:
Yeah, there’s two bills on the floor and no definition about what a stablecoin is. We know what it’s not though.
Alex Johnson:
Not a deposit.
Dara Tarkowski:
It’s not a deposit. Not a security. Not money, right?
It’s also not, nope, not money.
Alex Johnson:
I don’t know what it is.
Dara Tarkowski:
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 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.
Alex Johnson:
Not that we could get you any more wound up, you want to do a brief synopsis of the stable versus genius?
Dara Tarkowski:
Sure. So for those of you 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 like two hot seconds because none of these things really exist in a vacuum and like 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 that are currently in various stages of coming out of committee, but are alive and well and 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’s stable act and 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 like scooch some passage of those licensing regimes under the gun before this is passed and there’s 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, there’s a one-to-one backing of coin to fiat to the U.S. dollar, so that’s the same. There is going to be a prohibition on interest payments to stablecoin holders. There’s very similar custody and consumer protection standards. And 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:
This is the tether problem.
Dara Tarkowski:
What’s the tether problem, Alex? Tell me more about that.
Alex Johnson:
So the largest stablecoin issuer in the world is issued by Tether, USDT. And 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 types of assets they’re kept in. They are the favorite stablecoin of criminals internationally, and in fact, a lot of growth that they’ve seen over the last couple of years has been sort of based on a sort of fleeing away from more heavily regulated stablecoins like USDC in the U.S. 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:
Issues. 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 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’re 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. That’s bizarre to me.
It’s completely bizarre to me.
Alex Johnson:
Alex, what’s your favorite stablecoin use case? 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? Because I think 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 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 because 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 in. And then the other one is, as stable the name suggests, it’s a stable place for people living in other countries with less stable currencies to keep their money, right? So 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 kind of more from a policy perspective, what’s the argument for it? I think the two that I’ve heard brought up the most are, well, there’s three really. One, it creates more demand for US treasuries, right?
Potentially useful. 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 and your take on is it does create kind of a more permissionless platform for building things on, right? And I think about this in comparison to banking as a service. You know, 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 like a really flexible sandbox where you could kind of do whatever you wanted.
And as fintech companies and their sponsor banks got in trouble because of that excessive amount of freedom, the BAS became a little bit more regulated. It became harder to build. It was a natural regulatory reaction.
Stablecoins, I think, are seen as kind of a better alternative to the way that BAS 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.
Like, why don’t I just build on that? And 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. And so if you ask like what the sort of policy trade-off is, it’s competition versus continuing to keep deposits and business at banks.
Dara Tarkowski:
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.
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, like, yeah, crime.
Alex Johnson:
Well, and 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, right, where we can take banks into receivership, we can manage that, there’s a trustee that gets appointed and they can sort of 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, right?
To give one example, in the Genius Act, they actually require that stablecoin token holders get paid out in bankruptcy ahead of anyone else, right? 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, like, 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:
Right. And 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 subpoena 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. And even if it doesn’t happen today, tomorrow, you know it is. I mean, we’ve seen it play out like it absolutely is going to happen and it’s going to be, I think, even harder to manage and track.
Like, all I want is a definition. Like, why can’t they give us a definition?
Alex Johnson:
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?
I mean, I guess my opinion would be that it depends on what your natural competitive advantages are, and so I think banks are allowed to issue stablecoins 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 win or 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 clearinghouse are talking about a bank-led consortium approach to issuing a stablecoin, which I think makes a lot of sense.
Dara Tarkowski:
Nobody on the stage knows anything about a bank-led consortium. Yeah.
Alex Johnson:
Do you know any other 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 like 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:
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 go define their own true North Star. And 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?
And 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.
Alex Johnson:
Well, 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 is why we create regulation in the first place. I worry in a gutting of the CFPB in 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.
They’re just willing to be morally flexible. Well, it’s kind of a 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, right? And so it’s not just about policing bad behavior because sometimes the industry can think, oh, yeah, 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 because no one’s incentives are totally aligned. And that goes back to open banking in 1033. It benefits from a common set of standards.
And 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. Yeah.
Dara Tarkowski:
Yeah, because like we’re 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, big, oh, big B, since what, 2018? Like 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. And we’re still contemplating our navels.
And it’s like a little…it’s sad and dumb. It’s sad and dumb. That’s my hot take.
Alex Johnson:
Is that a legal term? Yeah.
Dara Tarkowski:
Sad and dumb.
Alex Johnson:
Well, that brings us full circle. Thank you for those who stuck it out with us. And 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:
Yeah.
J.P. Nichols:
Thank you, everyone.
Dara Tarkowski:
Thank you.
J.P. Nichols:
That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks. This episode was produced by a U.S.-based production team, including producer Elizabeth Severance, audio engineer Kevin Hirsham. If you liked this episode, don’t forget to tweet it out or post it on your favorite social media.
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Thanks again for joining us. We’ll see you on Breaking Banks next week.
