In a significant move that could impact the future of cryptocurrency regulation in the United States, Coinbase CEO Brian Armstrong announced that the company is withdrawing its support for the Digital Asset Market Clarity Act, just hours before the Senate Banking Committee is scheduled to vote on the bill. The decision comes after a review of the latest draft, with Armstrong stating that the bill, as written, would be "materially worse than the current status quo".

Armstrong articulated his concerns in a series of posts on X, citing several key issues. Among them is what he describes as a "de facto ban on tokenized equities," restrictions on decentralized finance (DeFi) that could grant the government broad access to users' financial data, and proposed amendments that would further restrict companies' abilities to pay "rewards" on users' stablecoin holdings. He also expressed worry over the bill's potential to weaken the Commodity Futures Trading Commission (CFTC) while expanding the Securities and Exchange Commission's (SEC) authority.

"We appreciate all the hard work by members of the Senate to reach a bi-partisan outcome, but this version would be materially worse than the current status quo," Armstrong stated. "We'd rather have no bill than a bad bill. Hopefully we can all get to a better draft".

The CLARITY Act aims to establish a clear regulatory framework for digital assets, defining when they qualify as securities or commodities and clarifying the jurisdictional boundaries between the SEC and the CFTC. It also seeks to establish new disclosure requirements for the crypto industry.

Coinbase's withdrawal of support is particularly noteworthy given the company's position as a leading cryptocurrency exchange and its active role in shaping crypto policy in Washington. Some observers suggest that Coinbase's move could significantly impact the bill's prospects, especially considering the need for bipartisan support in both the Senate Banking and Senate Agriculture committees.

Stablecoin rewards have emerged as a major point of contention in the negotiations. Coinbase had reportedly warned lawmakers that it might withdraw its support if the bill restricts yield programs tied to stablecoins like USD Coin. These rewards are a crucial part of Coinbase's business model, allowing users to earn roughly 3.5% rewards on their USDC holdings. Restrictions on these incentives could jeopardize a significant revenue stream for the company.

While the GENIUS Act, passed last year, prohibits stablecoin issuers from paying direct interest to holders, it doesn't prevent third-party platforms like Coinbase from offering rewards. However, the banking industry has raised concerns that allowing exchanges to pay such rewards could negatively impact bank deposits.

The revised bill uses the definition of "digital asset service provider" from the stablecoin-focused GENIUS Act, encompassing exchanges like Coinbase, as well as custodians and stablecoin issuers.

Armstrong's statement also alluded to the potential for the bill to grant the government "unlimited access to your financial records" and undermine user privacy, particularly concerning DeFi. The bill aims to pull more digital asset activity into the Bank Secrecy Act perimeter, treating digital asset intermediaries as financial institutions for anti-money-laundering, sanctions, and reporting purposes. It spotlights new standards and studies around higher-risk activity, such as mixers and cross-border DeFi use.

Despite Coinbase's concerns, other industry figures have expressed support for the CLARITY Act. Ripple CEO Brad Garlinghouse called it "a massive step forward," while Coin Center executive director Peter Van Valkenburgh voiced optimism about the bill's current draft.

As the Senate Banking Committee prepares to mark up the bill, the debate over crypto regulation in the U.S. remains complex and contentious. Coinbase's decision to pull its support underscores the challenges of aligning industry, political, and regulatory interests in this rapidly evolving landscape.