In a familiar crypto conundrum, a disruptor runs up against regulations
Most fintech companies have had Big Banking in their crosshairs since their inception, and Coinbase is no exception. The American cryptocurrency company has risen to prominence in recent years—with its accolade as being the first major crypto company to get US Securities and Exchange Commission (SEC) approval to go public on the US stock exchange—but they have recently run into hot water for overstepping their bounds, according to the SEC.
After planning to launch a lending product for customers who hold digital assets, Coinbase found those plans rebuffed by US regulators. In a blog post on Coinbase’s website, CEO Brian Armstrong outlined how the SEC responded to solicitations for guidance on their new “Lend” product with subpoenas for records and depositions and a call for a list of clients who had expressed interest. The SEC concluded their response by issuing Coinbase a Wells notice, essentially informing Coinbase that they intend to sue Coinbase in court.
In the blog post, Armstrong lashes out at the SEC for coming down on Coinbase when the company had been transparent about the introduction of its plans to introduce Lend, while their competitors have often benefited from the opposite.
The SEC’s response to Coinbase’s apparent transparency strikes an interesting chord for those interested in the fintech, blockchain, and cryptocurrency spaces. Many crypto companies have benefited from offering lending products on the market for years, and have done so without abiding by regulations, which themselves have often remained grey.
The real problem, and why the SEC has perhaps come down as harshly as they have on Coinbase, comes in the framing of lending products to consumers who might not know what to think of them. Most of the time these lending products are presented as alternatives to traditional savings accounts from banks. Savings accounts can be understood as loans to banks that could pose enormous hardship to consumers if incapable of being repaid. As such, federal deposit insurance is necessary, providing a trustworthy third party to consumers for ease of mind—a bank might go under, but the Federal Deposit Insurance Corporation is less likely to do so. The drama inherent in lending products like Coinbase’s in particular is that they are being guaranteed by their offerors, effectively negating the value of guarantees in the first place by having them come from the party holding your money and liable to failure.
While Coinbase might feel inclined to frustration given their transparency during the development of their product and a purported “lack of guidance” (per the blog post) from the SEC, the SEC is hardly setting a new precedent in cutting the cord on Coinbase’s product—they did something similar in binning Robinhood’s chequing account product in 2018. Georgetown Law professor, Adam Levitin, summed up the situation when he patronizingly tweeted: “The SEC doesn’t have the obligation (or the resources) to issue guidance about things that should be obvious to a baby securities lawyer. It’s really astounding that Coinbase thinks it’s entitled to anything more.”
Although fintech companies like Coinbase who make every attempt to abide by regulations while also attempting to disrupt traditional banking might feel spited by the SEC’s hardline stance, their indignation might sometimes be better pointed inward. Change in banking might be entirely necessary, but it will not likely come at the speed with which fintech players would like it to, despite their best intentions in making consumer-friendly products. Energy spent fighting with regulators might be better served in compiling a creative way forward in accordance with regulations.