Sep 9, 2021 - Economy

Coinbase proves crypto still hasn't grown up

Illustration of a gavel hovering over the Coinbase logo.

Illustration: Aïda Amer/Axios

Coinbase has bank envy. It wants to offer a dollar-denominated savings account — but those plans have been predictably halted by the SEC.

Driving the news: Coinbase seems genuinely surprised and upset about this. While their product looks like a heavily-regulated bank savings account, the SEC merely wants to regulate it as a security. But Coinbase doesn't even want that level of regulation.

Why it matters: Coinbase, the first major crypto company to get SEC approval to go public on a US stock exchange, is about as regulator-friendly as crypto companies get — it has positioned itself as being far more in compliance with U.S. regulatory strictures than overseas rivals like Binance or FTX. This week's news shows that the industry still has a long way to go before it truly comes to terms with the U.S. regulatory environment.

The big picture: All fintech is regulatory arbitrage, to some degree. In general, the greatest gains to regulatory arbitrage are found wherever there's the most regulation.

  • Banks are the most regulated part of the financial system, because they pose the most danger to ordinary citizens. It therefore comes as no surprise that many fintechs want to reinvent the bank account without the associated bank supervision.
  • Between the lines: A bank deposit (or savings account) is a loan to a bank, and if the bank can't repay those loans on demand, the damage to its customers can be enormous. That's why federal deposit insurance exists.

How it works: Coinbase explicitly framed its product in a June blog post as an alternative to bank savings accounts. (The phrase "savings account" appears five times in the first three paragraphs.) The company also said that the account was "guaranteed by Coinbase, giving you peace of mind while you earn interest".

  • Be smart: If a bank told you your savings account was guaranteed by the bank itself, that would be weird, and defeat the purpose of having a guarantee in the first place. Guarantees, in order to be meaningful, need to come from a highly trustworthy third party, like the FDIC.
  • Flashback: Coinbase should have been able to anticipate the SEC's reaction. After all, when Robinhood (which also isn't a bank, and doesn't want to be) tried to offer a product that looked like a savings account, that got shut down immediately.

What they're saying: "If the SEC wants to publish guidance, we are also happy to follow that," writes CEO Brian Armstrong.

  • The other side: "The SEC doesn't have the obligation (or the resources) to issue guidance about things that should be obvious to a baby securities lawyer," tweets Georgetown Law professor Adam Levitin. "It's really astounding that Coinbase thinks it's entitled to anything more."

Context: The Coinbase account was denominated in USDC, the cryptographic stablecoin developed by Coinbase and Circle that's pegged 1-to-1 to the dollar. The "yield" product was an attempt to generate more demand for USDC, and to further ratify USDC in the mind of the public as a safe alternative to actual dollars.

  • Circle has its own USDC yield product, but it's registered as a security, isn't a demand deposit, and is only available to accredited investors.

The bottom line: Coinbase's comparative advantage was supposed to be that it stands comfortably in America's regulatory good graces. But now Armstrong seems to be jealous of other crypto companies that offer similar products without SEC approval, and is picking fights with regulators.

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