The Biden administration had just taken office early this year when Paul Grewal, Coinbase’s chief legal officer, said on Fortune’s show Balancing The Ledger that he was “cautiously optimistic" about any future crypto regulation in the U.S. He added, “First and foremost, what we would like to see are clear rules for the industry so that, regardless of whether or not we agree with the rule, we understand how to comply with it.
Fast forward almost eight months (and past his crypto exchange's stock market debut), and Grewal sounds considerably more jaded. In a blog post detailing Coinbase’s attempts to get regulatory approval for a new product that promises 4% annual yield on customers’ deposits, Grewal said Tuesday that the Securities and Exchange Commission revealed it would sue the company unless Coinbase keeps the product “off the market indefinitely.”
Grewal’s objections echo ones lodged by his boss, Coinbase CEO Brian Armstrong. The founder took to Twitter to gripe about the regulators’ “sketchy behavior” and “intimidation tactics behind closed doors.” Armstrong said he disagreed with the SEC's determination that Lend, Coinbase's proposed high-yield product, is a securities offering, which would flout U.S. laws if it went live. (Anyone confused about why Coinbase’s Lend, which was slated to accept deposits in USD Coin, a so-called stablecoin designed a fixed price pegged to the U.S. dollar, might qualify as a security ought to read Bloomberg columnist Matt Levine’s elucidatory take.)
The SEC “refuse[s] to tell us why they think [Lend is] a security,” Armstrong continued. He pointed out the unfairness that “plenty of other crypto companies continue to offer a lend feature, but Coinbase is somehow not allowed to.”
One can understand Coinbase executives’ frustration: They tried to do the right thing by asking for permission, and they got punished for it. This rift between Coinbase and the country’s top markets regulator is emblematic of the degree to which technology has outpaced government’s ability to keep it in check. How can crypto companies stay in bounds if they’re guessing where the lines lay?
When I wrote my recent Fortune cover story about “decentralized finance,” or DeFi, I heard a common refrain from the experts I consulted. Michelle Gitlitz, who heads the blockchain practice at law firm Crowell & Moring, described the dilemma this way: “The SEC rules by enforcement, generally, and so it's really hard for those of us who are trying to give regulatory compliant legal advice.” The agency won't tell you what you're allowed to do, but it will hunt down anyone it suspects has done something wrong, in other words.
Jesse Powell, CEO of rival crypto exchange Kraken, put the state of affairs more harshly. “US regulators are beating down good actors because it’s convenient. Meanwhile, actual scams run unabated for years,” he commented on Twitter. “Who is behind the effort to drive domestic businesses and consumers offshore?”
When I spoke to Gitlitz a few months ago, she told me she expected to see a flurry of requests from SEC officials for information from crypto startups and projects in the weeks ahead—a prediction that recently came true. BlockFi, an upstart crypto lender, has already received multiple cease-and-desist letters from state attorneys general in places like New Jersey and Texas. Uniswap, a crypto exchange, is being probed, as are others.
If any companies, or projects, appear to be getting a free pass for their existing or planned high-yield, crypto lending-based products, such as Celsius, Nexo, Gemini, Circle, it's unlikely to be for long. One by one, the hammers will come dropping—until and unless someone puts up a fight.
Jerry Brito, executive director of the crypto-focused Think Tank Coin Center, urged Coinbase to go to war over the issue. Coinbase “should go ahead and launch its product, let the SEC sue, and go to court,” he said. “Let the SEC make its case and let a judge decide what the law is.” Apparently entertaining the idea, Armstrong retweeted the call to arms.
Washington, D.C. and the cryptoverse are very much still trying to make sense of one another.
Between the SEC’s warning shot to Coinbase, the crypto provisions in the White House’s infrastructure bill, and the revolving door of former government officials entering (and leaving) the crypto industry, it’s clear that U.S. regulators, lawmakers, and the industry itself are still only at the precipice of considering whether and how the U.S. government could oversee (or at least help monitor) some of the activity on crypto markets. But with the space’s rapid expansion over the past year, it is creating a mad dash for regulators to catch up, The New York Times reported this past weekend. From the article:
The cryptocurrency banking frontier features a wide range of companies. At one end are those that operate on models similar to those of traditional consumer-oriented banks, like BlockFi or Kraken Bank, which has secured a special charter in Wyoming and hopes by the end of this year to take consumers’ deposits and custody of their cryptocurrency holdings—but without traditional Federal Deposit Insurance Corporation insurance.
On the more radical end is decentralized finance, or DeFi, which is more akin to Wall Street for cryptocurrency. Players include Compound, a company in San Francisco that operates completely outside the regulatory system. DeFi eliminates human intermediaries like brokers, bank clerks and traders, and instead uses algorithms to execute financial transactions, such as lending and borrowing.
“Crypto is the new shadow bank,” Ms. Warren said in an interview. “It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system.”
“It’s like spinning straw into gold,” she added.
Fortune
