The curious case of Coinbase, Inc.
We talk here lately a lot about the crypto world’s losing battle against regulation. And to oversimplify: the crypto people think that they are not in the business of finance.
It started with ICOs that made like they were not really regulated IPOs, but they were and then SEC came after them. Then, of course, the SEC started chasing after things that allowed trading of ICO tokens because being a security exchange is something you need a license for, and they mostly did not have one. And the recent interview by SEC’s Chairman Gary Gensler made it very clear that they are more than OK to go after decentralized finance (DeFi) too despite its humanless nature, which we have talked about a lot too here.
So you could generally say that SEC really does not like crypto, I guess? OK, so a dispute between Coinbase and SEC elevated rather a lot this week, when Coinbase blogged about its frustration with the SEC: “The SEC has told us it wants to sue us over Lend. We don’t know why.” — wrote Coinbase’s Chief Legal Officer Paul Grewal. Lend allows people to lend USDC for a 4% yield.
We could talk here about whether Lend is a security or not, or even whether it actually turns Coinbase into a bank as Matt Levine brilliantly explained here.
Well, ok, let me try less brilliantly then: Coinbase is saying something like ‘Lend is not a security, it is a loan,’ while the SEC sure thinks it is a security because, you know, the Howey test is “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others”, and here sure someone is pooling money and managing them somehow to make a profit, but really neither of these arguments is 100% accurate because more than anything Lend is just a normal banking product — deposit taking and lending. Only, if Coinbase was a bank then the extent of its regulation would be on a completely different scale (like, for example, a 100% equity capital reserves to bitcoin requirement, so if they have $100 in bitcoin, they must have another $100 to back it up), and they probably (?) definitely absolutely don’t want / can’t afford that?
But who knows, maybe they do. It would certainly get the SEC off their backs, although I suspect that their stock price would be different.
Also more importantly, one line in Coinbase’s blog goes like this:
“Coinbase has been proactively engaging with the SEC about Lend for nearly six months.[…] We could have simply launched the product but we chose not to. This is far from the norm in our industry. Other crypto companies have had lending products on the market for years, and new lending products continue to launch as recently as last month.”
And you know this is very true. It means that the extent of SEC’s wrath might (soon?) be felt by many more crypto companies.
But also: the crypto people really think that they are not in the business of finance.
You could say that there are two reasons why that is — conceptual and technological — and that neither of them hold true anymore.
Conceptual come from the idea behind bitcoin and could be something like: cryptocurrencies are here to replace banks; they will change banking services from profitable business to information exchange.
…in the meantime, crypto has become a $-denominated profitable industry dominated by few centralized enterprises like he blue one above.
Technological revolve around the fact that value exchange and transactions are disintermediated; they run on blockchain. The old rules and legal definitions don’t apply because they are outdated.
We’ve talked here a lot about how regulation and legal prosecution follows substance over form, so that even if the law does not have the most accurate definition/description, but something should in principle fall into it, the courts will decide that it will.
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