Kyle Sonlin: The Controversial Battle Over Stablecoin Yields That Could Reshape Money Markets

(upbeat music) Welcome to the Investing News Podcast. I'm Megan Cedar and today I'm joined by Kyle Saunlin, president of Saunlin Ventures and president and co-founder of Global Settlement Network. Kyle is an entrepreneur, investor, and author with over a decade of experience in blockchain. Global Settlement Network, an infrastructure provider, helps regulated institutions issue digital assets, move money internationally and settle tokenized transactions compliantly and efficiently. His work sets out the intersection of tokenization, market structure, and regulation, especially around how digital assets get classified and brought into compliance frameworks. This gives him an in front-row view of the policy questions the Clarity Act is meant to resolve. Thanks, Kyle, for joining us and welcome. - Hey, so happy to be here. It's a great conversation, a fascinating time in the market and a cool opportunity to be able to talk more about digital assets, regulation, and everything I've built my career on. - Indeed. So with the Clarity Act really back in the spotlight this quarter, I thought it would be a great opportunity to learn a little bit more about it and what problems it's trying to solve from a market participants perspective. So how is the current uncertainty really impacting the market here? - Well, it's a fascinating line in this stand because the Clarity Act in just a few words is really trying to solve one question that we've been all collectively working on in the digital asset industry with different interpretations for nearly a decade, which is when is a digital asset supposed to be ruled or governed like a security? And when is it supposed to be ruled and governed like a commodity? And the really important reason why that's a distinction that needs to be made is certainly a few reasons, but the biggest one is which government agency is enforcing their rules on this industry and on these assets and on all of the companies that have built their business on top of this industry and this asset class. And then on top of that, there's a variety of requirements, rules, and things that differ depending on which distinction inevitably gets made. So that's a really important component of the Clarity Act. There are also a lot of questions around how yield gets paid out on stablecoins and a variety of other components that I think play a huge impact on the future of financial markets. - Yeah, the yield piece has been a major bottleneck in this process. Are you able to shed any light on that? What has been the big hold up and what arguments are each side trying to make? - Yeah, so this is a fascinating one because in the traditional industry, banks would hold on to the yield, right? And so if you were depositing your cash into a bank account, into a traditional firm, that bank would make money by lending out your money and we also saw the same thing with stablecoins where USDC or USDT were essentially providing you a dollar in the digital space and then they were monetizing the yield. And so the Clarity Act questions whether or not that yield from treasuries that are being parked to stabilize these stablecoins, it questions if that you're able to pass that through to the underlying customer or not. And so there are some real questions because a bank would argue that this is essentially just providing additional interest to the customer that they're already getting but forcing it through the token, it prevents you from doing these things completely through the genius regulation that was already passed around what banks are and are not allowed to do in issuing these currencies. So I think that it does, it's essentially providing money market style yields on stablecoins and this money in deposits would leave the banking infrastructure because of it. And so the banks are saying, look, we're losing control over where this money is going and how this yield is being allocated and that is bad for compliance, that's bad for the customer. Crypto and the broader decentralized argument is basically saying that we should be able to pass through whatever, this is revenue sharing, this is not issue or paid interest. And so we want to be able to provide this to anybody if we're generating yield on your currency, we should be able to prorate a pass that through to you. There are also some fascinating implications because if you have yield bearing instruments, AKA dollars that are generating money market form yield, it also theoretically would create more inflation within systems that are backed by a dollar because now you're backed by a dollar plus interest rate. And so that actually does have a lot of ripple effects down the line in other collateralized industries and in other things that it just shakes up the snow globe pretty dramatically when you can kind of automatically enforce this money market or government bond interest and attach it immediately and programmatically to your dollar. And so I think that especially in a lot of cases, the banks are like, whoa, whoa, whoa, whoa, whoa. Let's just try to solve one thing at a time instead of kind of drinking from the fire hose with respect to the opportunities and possibilities from this industry. - Good analogy, drinking from the fire hose, I like that. So how could this bill, as it's written, influence real world asset tokenization as well as regulated digital assets and institutional adoption? - Yeah, this is really the number one question. And so one of the really important things that the Clarity Act tries to do is it delineates between a token sale and a unregistered security or what the token looks like after it's been listed. And this is something that I built my previous company that I was able to sell alongside our partners was a data business tracking, tokenized securities and broker-dealer exchanges around the world. And one of the things that in the previous administration, Gary Gensler, the SEC chair, was very critical on securities and even just digital assets in general. And he felt, and he was under the position that all of these cryptos and ICOs and digital assets should function as securities and that they were securities. And my main pushback against that perspective was that a lot of these tokens were using, were used as fundraising vehicles, which in and of itself is a potential compliance risk, right? If you're raising money and instead of giving equity, you're giving tokens, that certainly does look like you're selling an investment contract for tokens. The problem is that those tokens did not own shares of the company. They were not entitled to cash flows or intellectual property or ownership of any hardware or materials that that company owned. And so therefore, I think forcing these digital assets into the bucket of a stock would be improper. If you were able to go to a stock market on Robinhood and buy Apple stock or buy Ethereum, the reality is that those two things are very different, right? You're not buying stock in the company Ethereum. You're just buying a token that represents the network. And so even if you felt the way that Ethereum or whoever fundraised for their company or with their digital asset, that doesn't necessarily make the digital asset itself equivalent to a traditional stock asset. And so I really do think that that's an important clarification that they are trying to make and trying to bridge the gap, which does help in a lot of these industries and delineating from real world securities versus digital assets. It also provides a lot of guidance on how financial services firms, how broker dealers, how exchanges can, how these different providers can work with these types of asset classes, which is very, very important and can be a real bottleneck in hurdle. - Yeah, the pendulum has swung quite far from Gary Gensler's days. In your opinion, have these bills, the clarity act, and even the genius act if you wanna, if we can just compare the two. Struck a good balance between helping, encourage innovation and reducing legal risk. - Well, look, I think that one really core component of the risk that was provided by the market was actually a lack of clarity, right? And so not even in terms of clarity in all caps representing the act, but actually just a lack of clarity with respect to what to do. And so since Dodd Frank, since the changes to the banking system following the 2008 recession, we've seen the ever encroaching compliance department, essentially ruling and running most financial services and financial institutions. And so all of these compliance departments have their red flags and sirens blaring when you have to do with anything that has to do with an activity that is in a regulatory gray area. And especially, well, again, we look at what the previous administration, with the Fed, they had a variety of policies that had to do with reputational damage of the types of business dealings that a bank or institution would do and that those things so they could be held accountable or be debanked for doing services that weren't necessarily illegal and weren't necessarily structurally risky at all, but just had a reputation risk associated of one of those things was the crypto industry. that was attached to that. And so if you're a compliance department, you're looking at the field saying, okay, there is no rules necessarily on what we're allowed to do. And so it's not like we're not allowed to do it, but again, for a bank, for a regulated institution, they really only want to try to do things that they know they're allowed to do. And then of course, there's this flip-flopping administration which also presents some risk on like, okay, we think we're good today, but we might not be good tomorrow. And in the past, they have suggested that just doing things that seem or appear on savory also can be against the rules, even if we think we're doing everything fine, it does present the perfect storm of the type of firm that's gonna look at that and say, you know what, we're just gonna wait and continue to wait until we have the green light. And so I think they're really just providing a green light in whatever it is is actually good for the industry because it does allow these institutions to participate in I think a bit more detail. For sure, so late 2025, the bill had strong momentum and here we are in the middle of 2026 and it still has not passed, but we are seeing a major push to try to get it passed early into August. So what changes would be in store for capital formation, secondary markets, liquidity and compliance if this bill manages to advance in August? - Well, look, I think it would be a key development in the current administration's views on pushing forward to the last set legislation. I think that there's gonna be a lot of turmoil at midterms. This is definitely the best chance that this administration has in pushing forward this type of bill, which I do think would be tremendous because it does replace a lot of the regulation by enforcement risks that we've seen from this industry in the past. I do think that that's something that the SEC probably will always do to some respects, but again, it provides that green light. It does allow exchanges and brokers and all these different dealers to have a clear registration path. Again, something that I do think is really needed in the industry to your point around secondary market liquidity. We spend a lot of time working with cost indication networks, bringing broker dealers together, helping focus that liquidity. The more that we can bring into the industry, especially from the buy side, is going to be pretty important. There's custodial implications here on the fact that there are qualified digital asset custodian provisions within the Clarity Act, which is really important and pretty exciting. There's also a variety of different DeFi level carve outs here, which I think could be pretty useful for the industry with respect to a lot of these things. So, as I said, I think that the biggest value from a liquidity perspective is that it just provides institutions with the green light to participate. They are the ones that have the balance sheet to provide. And so being able to use digital assets in authorized activities is going to be, I think, a really core value because at the end of the day, with the clients that we work with, the pitch to use blockchain, the pitch to use digital assets or really just a reduced cost to capital. We think that it's cheaper and faster and more efficient to use digital assets versus the traditional ledger. And thanks for not stupid, right? That's their whole business is to make money. And so if they see that too, they're going to use it as long as they're allowed to. - Do you see a pocket of this market that stands to be an early beneficiary once this bill gets passed? - Well, I do think that all of the payments companies that are leveraging stablecoins definitely have already benefited from genius level regulation, but applying clarity as a double click, I think that the stablecoin market has continued to blow up in a tremendous way, which has really demonstrated this value of this use case. I think these providers are going to see a dramatic benefit from really unlocking the on-ramping off-ramping scale. I do think that there are some questions around money transmission that the clarity act does not particularly reference, which in of itself is a bit disappointing for me as somebody that does a lot of work with the state-to-state regulation. So those questions I think are still to be answered, but on top of that, existing assets that have real demand, we see a lot of demand for private credit. For example, I think this is going to be a market that continues to explode because you're going to be able to see yield bearing instruments that generate real returns in a tangible way for underlying investors you're providing credit to existing industries, existing markets that don't necessarily need to understand the ins and outs of everything with respect to organization. They just need to benefit from the capital technology. So I am personally a incredibly bullish on private credit. - So what are the remaining sticking points that need to be addressed? - Well, the big one is going to be the resolution of the stable coin yields and how those get passed through and if institutions and banks are required to pass those through to customers. This is what Brian Armstrong and the Coinbase CEO famously kind of removed himself from the conversation and had a very frustrating outburst online discussing how they felt that the banks were kind of arguing in good faith or benefiting themselves. And so that's a pretty core component. There is unfortunately an ethics sticking point it seems like within the Democrat side of the voting block around the current administrations, crypto forays and the benefits that they may have realized from some of these initiatives. I think that the $1.4 billion crypto income disclosure from the tax returns did not necessarily benefit the Republican's position on digital assets. So I think that that ethics concern is still one of the bigger components here as we've seen across the aisle for a decade plus now it does seem like Republicans and Democrats just like the sideline everything and still everything by disagreeing. So I do still feel like that is difficult. So between the ethics clauses and just concerns which again may or may not be unfounded but someone's opinion and someone's opinion the stablecoin yield pass through around how genius issuers if that interest band follows the money platforms or not and if they can actually provide that through or does it stop at the issuer themselves again, banks say that this is a loophole that they want to close crypto people say that this is intentional and of course Coinbase I think has over a billion dollars of revenue tied to this particular business vertical. So they're heavily incentivized to maintain the loophole and maintain this yield pass through. Then there's a couple of other question marks that are I think lighter in my opinion, law enforcement and how those things, how criminal investigations are procedurally processed. Obviously law enforcement's a very big thing but procedurally how it gets done and how it's denoted through the clarity act and a few other things are still on the board, but we're running out of time and it is fair to say that this upcoming vote is gonna be pretty important in either pushing this through or not and again the news on the Trump family and how much they made on crypto. I'm not sure made it any easier for this bill to get passed. - You're right, these next few weeks are gonna be watched closely, so what shouldn't market participants be paying close attention to in the coming weeks? - I definitely think that the ethics concern is gonna be the big sticking point and figuring out how the Republicans can and proponents of the clarity act are going to be able to spin this to convince people that there's a lot of benefits here. That's gonna be the one that I really think is the big sticking point because three are policy fights that we can draft around, right? We can work on the different terminology. I do think everybody's heavily incentivized to get this done before the midterms, but the ethics fight is about the president personally and that one is a bit harder to draft around I think. I think that there's a couple of signals. The week of July 20th, I think is the floor vote, so that should be next week from recording, but there is that practical cut off. I think it's the first week of August, something like that. So we really do have a couple weeks left to really participate here. Seeing a merge to draft is going to help us understand. Okay, great, a lot of the structural, procedural stuff that we mentioned is wrapping up and we have found a conclusion there and then figuring out the rest of this stuff is going to be at play. I do think it's amazing, for example, that a company like Securitized went public where we're seeing more of these real companies that are bringing products to market. We're going to keep issuing different deals and commodity deals with emerging markets. We're working on a variety of private credit solutions in market. The reality is that while Clarity Act does provide a lot of value, the industry is not dependent on it. And I think that this is something that I talked to a lot of our clients, a lot of our partners about now is that we're doing everything right now, fully legally, fully, completely and are really driving this market forward. Clarity certainly provides a lot of unique insight and a value for some of our vendors and licensed partners along the line. And it certainly I think would drive adoption significantly. but especially when we look at emerging markets, the fact that genius and clarity have made it to this far is enough of a green flag for many of these emerging markets and additional governments around the world to really pay attention to this in a big way. And I think that getting these bills this far in and of itself is a pretty huge win for the adoption of the digital asset industry and it is here to stay. Whether or not we have to negotiate and discuss how these terms are described and the purview of different individuals, it doesn't change the fact that we are in a different leak with these types of assets, with this technology, then it feels like we were even five years ago. And that's tremendous and incredibly exciting. - Mm-hmm, for sure, even two years ago. Thanks so much, Kyle, for joining. - Thanks so much, Megan. Happy to be here. - I'm Megan Cedar, that was Kyle Sonlin and this is the Investing News podcast. Also check out our website at InvestingNews.com.