Fintech

Coinbase: Give crypto its own regulator. Everybody else: Are you crazy?

Other crypto leaders call the idea for a single agency regulating crypto impractical — even stupid. That didn’t faze Faryar Shirzad.

Faryar Shirzad, Coinbase’s first chief policy officer

Faryar Shirzad continues to argue that crypto is a game-changing technology requiring a totally new framework.

Photo: Coinbase

Faryar Shirzad, Coinbase’s first chief policy officer, left a 15-year Goldman Sachs career last June to help draft the crypto company’s game plan for the coming battles over regulating digital assets.

His ideas are already shaking things up at Coinbase —even across the industry. In October, Coinbase unveiled a policy framework which included an idea many found jarring: a single regulator for crypto.

“To avoid fragmented and inconsistent regulatory oversight of these unique and concurrent innovations, responsibility over digital asset markets should be assigned to a single federal regulator,” Shirzad said in a blog post.

It’s a bold proposal that addressed the current patchwork of regulation crypto companies face. But it quickly got scathing reviews from leading figures in crypto and fintech.

Kristin Smith, executive director of the Blockchain Association, the industry lobby group in Washington, said it was “not politically viable.” Dan Gallagher, Robinhood’s chief legal officer, called it “just plain silly.” In a recent interview with Protocol, INX General Counsel Cathy Yoon argued that for crypto companies “to ask for a separate standalone regulator specific for our technology — that to me is stupid.”

Shirzad has been unfazed by the criticisms, as he continued to argue that crypto is a game-changing technology requiring a totally new framework.

“The power of crypto is so transformational and so foundational and changes the assumed structure of the financial system that that point needs to be understood and embraced — even if, in the end, policymakers and the United States decide to take a much more incremental approach, we wanted to at least put that point out in sharp relief,” he said.

Shirzad, who served on the National Security Council under President George W. Bush before joining Goldman Sachs, elaborated on Coinbase’s position in an interview with Protocol. He also talked about his decision to join Coinbase and the key lessons from a career that took him from the White House to Wall Street.

This interview was edited for brevity and clarity.

What made you decide to move to Coinbase after a long career at Goldman Sachs and Wall Street?

It was fascinating. I got a call from a recruiter who said Coinbase was interested in talking to me and I thought, “Well, why not?” To be frank, I didn't know that much about Coinbase. I obviously knew about it, but I didn't have any particular expertise in it. I talked to Paul Grewal, who is the CLO [chief legal officer] and Emilie Choi who is the COO. And I got hooked. In the course of all of that, I also did my own research. And it was a journey that I sort of launched into that I'm still on and I'm super excited about it.

When did you first hear about bitcoin and the whole crypto realm?

I heard about crypto very early on. I'm a policy guy so part of my job and my career has been to track innovations and kind of watch them. It's kind of what you do in government and then the various policy jobs I have. You sort of see things that could become something. The nature of the jobs I've had is to kind of watch things that may not seem that important but may have broader consequences down the road. Crypto was one of them.

Faryar Shirzad in the White House Shirzad (right) worked on the National Security Council in the George W. Bush administration.Photo: Coinbase

What gave you pause about taking the job?

The biggest factor that I brought into every one of my conversations was that I’ve built a reputation over the course of decades of public service and the biggest issue for me was: Is this a company and a mission that I wanted to be a part of? Do I have conviction about it in a way that would work for me and would be sustainable, that would be a passion of mine?

I think fundamentally I'm a policy guy. I'm fundamentally passionate about good public policy. Crypto is an area and an innovation that is so potentially consequential and transformational and, by its nature, tests a lot of the habits of policymaking and politics and tests a lot of the parameters of existing policy. It's very hard for everyone to figure out the adaptation. [Coinbase CEO] Brian [Armstrong] and Emilie and Paul and everybody very much want Coinbase to go deep on helping contribute to that exercise of figuring that out.

That's when it became irresistible. I just thought, “I really want to be a part of this.”

I actually got the final, final elements of [the offer] when I was on a mountain bike trail with my son in North Carolina. [Laughs.] So we stopped and that's when I made my decision.

Are there tactics or approaches to government that, based on your years with Goldman Sachs and on Wall Street, you know don’t work and which you’ve told the Coinbase team, “Hey, we’re not going to go there”?

I think the first thing is analysis, data and content matter and are formidable by a million miles. The second lesson is: You don't win by talking your own book, as we used to say at Goldman.

What does that mean?

What that means is that policymakers aren't interested in protecting your business model or whatever. You can't go in there and say, “Oh, this is inconvenient. I don't want to do it.” Or, “This is expensive. I don't want to do it.”

That rarely works, particularly in the post-financial crisis period. You really have to talk about markets, society, communities, the economy, the functioning of financial markets, the functioning of fundamental parts of what government’s there to manage and protect.

The new Coinbase policy framework, which came out last year, proposes a regulatory position or agency to deal with crypto. That’s a change from Coinbase’s previous position and it’s been reported that you were responsible for that new approach. Can you comment on that?

We initially tried to do what a lot of other people do, which is to come up with a proposal that worked within the existing financial regulatory architecture. In the end, we realized the regulatory system is organized around the regulation of intermediaries. So you'll run into a hundred problems if you try to adapt to the current system, just as you'll run into a bunch of problems if you try to start afresh.

But in the end, given that we don't know where the potential of this technology is going, it was the right thing to do, to at least make the point that it needs its own framework and it needs its own regulator.

It’s not necessarily a new regulator. It can be an existing regulator, but it needs to have a mandate that covers digital assets broadly and then do what every other regulator in almost every other market in the world does — which is to have a single regulator who focuses on outcomes, rather than having to be very careful about jurisdictional lines so to speak. That's not an issue or dynamic that other regulators deal with, but it's very much a feature of the U.S. regulatory system.

And that's why we landed on that, even though it's very hard to change the way our regulatory architecture is at the moment. It was a really important point to make as a framing issue as people look at how to approach the sector.

There’s a bunch of ways you could do it. It could be any of the current agencies or it could be a bureau I guess … as long as they're empowered to do it. This innovation is so enormous. You can see that the transformation will be comprehensive.

But other crypto companies argue that the Coinbase proposal is impractical. Some were very critical.

We talked to probably 35 different firms and stakeholders in the crypto world before we came out with our thing and at least as many members of Congress, as well as a bunch of other smart people. Plus we got the top law firms in the country working with us.

Remember, our proposal wasn't intended to be handicapping what Congress is most likely to do in the shortest period of time. Our proposal was intended, in a very earnest way, to lay out what the right outcome would be.

Now, there's a lot of good proposals that people have that are much more incremental, maybe much more realistic, much more “take as a given the existing architecture.” And we support a bunch of those things and we commend people who were advancing them.

But at the end of the day, it's very important for people to understand that the power of crypto is so transformational and so foundational and changes the assumed structure of the financial system that that point needs to be understood and embraced — even if, in the end, policymakers and the United States decide to take a much more incremental approach, we wanted to at least put that point out in sharp relief. That was our purpose.

That point we've made is unarguable. I've been in this business for a long time. If you want to argue what the right outcome is, it's hard to argue with what we propose, even if it's aspirational.

What does the right outcome mean?

You have to have a separate regulatory framework and that regulatory framework should be regulated by a single regulator, whoever that is. Remember, Ben, the only country in the world that has such a fragmented financial regulatory system is the United States. If you look at the important markets — Germany, France, the European Union, U.K., Switzerland, Hong Kong, Japan, Singapore, India — they have one or two regulators, nationally. That's it. When those regulators look at issues, they look at them and say, “Okay, well what's the outcome we're regulating for?” The U.S. regulators are constrained by the fact that they've got very tight perimeters of regulation organized around the intermediaries they regulate.

When you've got a disintermediating technology like crypto, it's really a mind-bender how you fit a disintermediating technology into a regulatory system organized around the regulation of intermediaries. Our solution is, well you do it the way every other country in the entire planet has done it which is to pick a single regulator and give them the mandate to do the right thing.

There’s also the view that crypto companies, including Coinbase, are trying to minimize the role of the SEC, essentially to sideline it. How would you comment on that?

Absolutely not. You know, as a company, we have enormous respect for all the regulatory agencies everywhere. We're regulated by a multitude of them all around the world. Plus, the idea that we would be sidelining anybody is preposterous. It's just not within the scope of anything we have the capacity to do or or anybody would be interested in seeing us do.

We were just simply making the broad point which is: Transformational technology requires a new rethink. Imagine in the days of the horse and buggy, somebody shows up with a car and you have two choices: Do you adapt the horse and buggy rules to work for a car? Or do you say, “Well, this car is a new thing. We should have a car regulator that makes sure you know that all the public interest things that we need to watch out for with this vehicle are protected.”

I think with that example, you’ll say to yourself, “Of course, it's a car. It’s a new thing. It's not a horse and buggy.” That's kind of what we're saying. You could spend a ton of time trying to make sure the saddle rules on the horse and buggy can be adapted to the car.

Or you can just say, “We could spend a lot of time adapting the old rules, or we could just recognize that this does the same thing. It gets you from here to there and helps you transport people and things. But it's just fundamentally different and requires its own regulatory system.” It's not more complicated than that.

The debates and the battles over crypto regulation are expected to heat up this year. What is your biggest worry?

The biggest worry I have is that you have a single regulator overcalibrate for one issue, one aspect of crypto and potentially decides the strategic direction that this country takes in crypto in ways that we've not fully considered.

Can you give an example?

Yeah. In the infrastructure bill, there’s a provision that basically said that, for crypto and for digital assets, anybody who helped facilitate the transfer of a digital asset would have to produce 1099 [tax] information.

So who is that? The software developer? The validator? The gas company that provides heating for the building in which the software is developed?

That potentially puts us in a position where it's impossible to do those activities because people who have no proximity to the end user and have no ability to gather that information could be required by law to provide it, to gather it and provide it, even though they have no ability to do so.

It's not a strategically sensible outcome. And I think members of Congress and the Senate understood that and that's why there was a broad bipartisan effort to fix it ultimately, unsuccessfully. But that's why you hear the administration talking about doing an executive order or something. There is some reason for optimism on it. We'll see where they land.

But I think, in the end, the president has to weigh in, just like Bill Clinton did in 1993 with the White House statement on the internet. We're in a very similar moment here. We're in like the 1993 internet moment with crypto.

You see this technology. You see that it’s disruptive and transformational. You understand that the use cases are developing by the week so we don't know quite where it's going. Regulators shouldn't give it a complete pass — but at the same time inhibiting its innovation will have strategic and broad-ranging consequences that we can't even imagine at the moment. So you need to look at this technology, from the governmental perspective, with some strategic orientation that we’ve got to do this.

The United States has a proud tradition of promoting and accommodating innovation. It's gotten it wrong here and there, and from time to time, and then it has to fix it.

This goes back to why I came to Coinbase. This is one of the big important moments in policymaking in our lifetime. And we’ve got to get it right.

I'm hoping the president's involvement will bring that kind of strategic sphere that's marked with appropriate attention to the risk but with an American optimism about its potential.

Update: This story was corrected on Feb. 2, 2022, with the month Coinbase introduced its regulatory proposal.

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