Opinion The Growing and Controversial Field of Crypto Banking

The Growing and Controversial Field of Crypto Banking

September 18, 2021

Coinbase is one of the most successful corporate stories that blend the crypto industry and the mainstream US financial ecosystem. Since it came out on the stock market, but also for several years prior to that, the same digital currency exchange was seen by most as the model business operating outside of the often poorly regulated international cryptocurrency arena. Yet, now, Coinbase seems to be on a collision course with the US Securities and Exchange Commission or the SEC. It recently issued Coinbase with a Wells notice. It is a legal document that forewarns a company that SECO is about to start legal action against the same business. In many ways, it acts as a final warning to a business. 

It states that the same company has to get its house in order in financial and business terms. If it does not, the SEC will begin serious legal proceedings against it in the immediate future. Of course, as the crypto media already explored, the problem is the incoming crypto lending program, which will begin operating under the name Lend. For the SEC, Lend is nothing more than an unregulated service of a security offering. Coinbase, on the other hand, is saying that laws that are nearly a century old (dating back to the Securities Acts of 1933 and 1934) are not applicable to the crypto services and products, which were completely unimaginable back then. The incoming regulatory battle promises to be both bitter and hard-fought on both sides. But, it also opens up the wider topic of crypto banking. How will big players in the domain of crypto custody and services act inside of that growing and controversial field, and what are the big pitfalls for all involved?

Promotion of the Lend Program

The backstory for most elements of the crypto technology is and remains in the realm of regular finance and traditional mechanisms of the creation of money. Coinbase Lend has not even launched and is currently in the pre-enrolment phase, which is why the company has been marketing it to its customer base. The company describes the Lend program as a process where the clients can lend USD coins to those who the platform labeled as verified borrowers. Through that, the clients can earn up to 4 percent APY1. That is, according to the Coinbase pitch, somewhere around eight times the national average for traditional high-yield savings. 

The company also says that the savings funds that the users’ deposit are safe. However, in the footnote, Coinbase also warns that it is by no means a bank, that it offers nothing that is legally defined as a high-yield savings account, and most worryingly, that there is no insurance on the deposit. So, the invested crypto funds are nowhere near fully secure and safe. Instead, they are at a risk and this promotional campaign shows that Coinbase is taking a book out of the esports and gaming industry: acquire users hard and fast first, then ask the hard questions later. 

Creation of Modern Banking

For many people, it might sound strange to hear that banking services have been around for hundreds of years, even in a form that is very similar to the modern setup. While most people would think back to the 19th century as the birthplace of modern banks, the process began centuries before that, in a range of European countries. While money lending as a process dates back well into Antiquity, the modern banks were created in places like Northern Italy and the Netherlands, when wealthy entities, mostly private or family-run, began to pool their resources together. 

Groups like the Medici family have been some of the pioneering forces behind those initiatives, growing incredibly wealthy as soon as they took off. Since then, borrowing money through the organized businesses known as banks is something that most people who have access to these services take for granted. But now, with DeFi services and entities like Coinbase, the same principles of modern banking are getting turned on their heads. That is what is putting the SEC and this private firm on a collision course, while others in the crypto industry follow with a particular interest and a wested one at how the same conflict will turn out. 

Smart Move

Right now, the atmosphere that Coinbase is generating around it, at least when it comes to the traditional banking sector and the regulatory agencies, is quickly getting frosty. So, the smart move, according to many experts from these fields, would be for the fintech company to put its Lend plans on a hold. Furthermore, some are noticing that this product already looks very similar to businesses like BlockFi and their services, which were previously shut down by the SEC. 

However, the same company is seemingly planning to fight the SEC, which is a completely unacceptable proposition for many, especially because of the fact that Coinbase is now a publicly-traded entity in the US. Presently, the way how the Coinbase team is planning to take on the regulators is not clear. Some indications point to a strategy of pleading full innocence. Others believe that the same team might be a lot more combative, as they will be hoping to generate public interest and at least sympathy from the crypto markets, which find themselves in a similar boat. 

Complicating Narrative

While no one can tell, in all likelihood even inside of Coinbase, how this fight will take place, the general conflicting trajectory that pits crypto companies against the SEC is clear. The reasons for this are something that has been quietly simmering for years, ever since it became clear that with ethereum and blockchain 2.0 banking services are now fully in the grasp of cryptocurrencies. Now, the same power struggle is moving away from places that do not have access to regular banking services and thus need to use things like BTC tokens and migrating to the developed nations. Here, many are asking why they cannot get a 4 percent ROI through a risk they are willing to take with companies like Coinbase. From that perspective, the SEC seems less about consumer protection and more about traditional finance protection.