Coinbase and the SEC: In Goliath Versus Gensler, Don’t Bet Against the Big Guy
Plus, digital wallets are blowing away other payment methods around the globe.
Number of the Week: $60 million (explanation below)
Coinbase and the SEC: In Goliath Versus Gensler, Don’t Bet Against the Big Guy
When you cover the business of money long enough, you realize that some financial regulatory battles are inevitable. Such is the case with the U.S. Securities and Exchange Commission (SEC) and its “forever war” on crypto. SEC chair Gary Gensler’s recent remarks can only be described as combative and largely unhelpful as the agency attempts to get its arms around the rapidly evolving world of crypto assets and powerful crypto exchanges like Coinbase and Binance.
In prepared remarks given at the Columbia Law School conference this week, Gensler talked about the role the agency plays in finance, and the importance of securities disclosure rules on things like climate, cyber risk, special purpose acquisition companies (SPACs), and executive compensation in protecting investors and for providing more efficient markets. He then got to the real point of his address: “There are participants in crypto securities markets that seek to avoid these registration requirements. No registration means no mandatory disclosure. Many would agree that the crypto markets could use a little disinfectant."
Crypto exchanges are clearly in Gensler’s crosshairs. In June 2023, the SEC charged Coinbase with operating its crypto trading platform as an “unregistered national securities exchange, broker, and clearing agency,” making “billions of dollars unlawfully facilitating the buying and selling of crypto asset securities.” It also charged the U.S.’s biggest crypto exchange for failing to register the offer and sale of its crypto asset staking-as-a-service program. Coinbase then petitioned the SEC to create new rules specifically for the digital asset industry, which the agency refused to do. Coinbase is now taking on the SEC in two separate court battles, one appealing the SEC charges that it violated securities rules and the other accusing the agency of violating the law. In November, the SEC charged Payward Inc. and Payward Ventures Inc., collectively known as Kraken, with operating its crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency. Binance, which agreed to pay $4.3 billion in November to settle a case with the Commodity Futures Trading Commission (CFTC), is now locked in a battle with the SEC over its regulatory authority over crypto assets (In June, the SEC accused Binance, its former CEO and the exchange's U.S. arm of artificially inflating its trading volumes, diverting customer funds, and failing to restrict U.S. customers from its platform, among other things. It also accused Binance of unlawfully facilitating the trading of several crypto tokens as unregistered securities.)
Despite the SEC’s enforcement efforts to rein in the cryptocurrency exchanges from what it deems to be illegal behavior, there’s a strong case to be made that waging a relentless legal battle with Coinbase could be counterproductive in the long run. The company is moving quickly to provide more than support for the storing and trading of cryptocurrencies as it works to remake the financial system. In a recent Bloomberg Markets TV segment, Coinbase CEO Brian Armstrong argued that the use cases for crypto are strong and growing, adoption of the technology by Americans is increasing, and policymakers and regulators that dismiss crypto do so at their own peril: “Being anti-crypto is political suicide.”
Armstrong went on to say that since spot bitcoin exchange-traded funds (ETFs) were approved in January by the SEC, $12 billion of inflows came into the system, with Coinbase the custodian for “about 90% of the assets in those bitcoin ETFs,” representing monetization opportunities without cannibalizing its retail and institutional products. “There’s a new generation of people [that] wants to see crypto update the financial system because 87% of Americans say the current financial system doesn’t work for them. …That’s why we think crypto is the most important technology to update the financial system globally.”
Earlier this month, Coinbase announced a plan to raise $1 billion by selling convertible bonds, taking a page from Michael Saylor's playbook for MicroStrategy’s expansion. On Friday, Coinbase’s closing price was $255.51, up from $180 in mid-February. “Eventually, we should have index funds. You know, hopefully, someday there can be a Coinbase 500—like the S&P 500—with the top 500 coins by market cap. …Coinbase can be an infrastructure provider to traditional financial services, and we can be the retail and institutional app for people who want to directly use crypto,” Armstrong said in the Bloomberg Markets interview.
Gensler may have met his match in facing off against Armstrong. In Washington parlance, the Coinbase chief has assembled an impressive ground campaign to convene and engage crypto industry players, policymakers and regulators in discussions on the digital future of money and the need to pass crypto-specific rules. But unlike Sandy Weill—the former CEO of Citigroup credited with paving the way for the repeal of the Glass-Steagall Act by merging Travelers Group and Citicorp, which radically transformed the financial industry in the late 1990s—Armstrong is relying on innovation, rather than political muscle, to methodically remake the modern financial industry. For all that Weill possessed in lobbying prowess, Armstrong is pushing the bounds of digital asset innovation at a breakneck pace while also asking regulators to meet him at the crossroads of innovation and regulation.
Armstrong’s not alone in his legal fight to compel the SEC to write new crypto rules. In a show of support, Paradigm, the Crypto Council for Innovation and others have filed amicus briefs with the U.S. Court of Appeals for the Third Circuit. “As long as the SEC’s registration process requires a centralized issuer, it will be incoherent for crypto assets, meaningful disclosures will not happen, and the public will not have access to the material information that it needs,” according to the Paradigm friend-of-the-court filing.
Gensler is no stranger to financial services and the industry’s impact on the economy. Before his appointment at the SEC, Gensler was professor of practice of global economics and management at the MIT Sloan School of Management, the former chair of the CFTC, and a partner in Goldman Sachs’ mergers and acquisition department, head of its media group and led fixed income and currency trading in Asia.
To be clear, some federal crypto industry regulation is required to prevent fraud and money laundering, protect investors and ensure that markets operate efficiently. If Gensler is serious about crypto disclosure and registration requirements as a means of maintaining market integrity without stifling innovation, then the agency’s refusal to consider issuing new crypto rules and its delay of the approval of spot Ethereum ETFs will only lead to an incessant cycle of legal wrangling that does little to slow the pace of innovation by market players and growing adoption by investors. “The Ethereum ETFs very clearly should be approved. …So if it does get delayed unfairly, the industry will have to follow a similar path to what happened with bitcoin, which is they’ll essentially go to the courts, and the courts will compel the regulators to follow the rules,” Armstrong said. “I was really pleased to see Coinbase named as the custodian in five of the eight Ethereum ETF applications, so it continues to be an endorsement of us as a platform that people want to build on top of.”
As Coinbase becomes what Armstrong refers to as a “systemically important financial institution,” the SEC is reportedly preparing to classify ether as a security, ratcheting up its turf war with the CFTC and likely triggering a slew of lawsuits from industry players.
Noted & Noteworthy
Largely motivated by tech-facilitated convenience, consumers are dictating the future of payments by their preferences to conduct transactions. Worldpay just released its 2024 Global Payments Report—160 pages in total—providing detailed insights and payment method forecasts for 40 markets across Asia-Pacific, Europe, Latin America, Middle East and Africa, and North America. The following are some of the report’s notable findings:
Digital wallets rule. Wallets accounted for 50% of global e-commerce spending (more than $3.1 trillion) and 30% of global point-of-sale (POS) spending in 2023 (more than $10.8 trillion). As the fastest-growing payment method, digital wallets are projected to account for over $25 trillion in global transaction value across e-commerce and POS by 2027. Competition is fierce among these subsets of digital wallet providers: smartphone manufacturers and operating system providers (Apple, Google, Samsung, etc.), leading global e-commerce platforms (Amazon Pay, Rakuten Pay, ShopeePay, Mercado Pago, etc.), fintechs and super apps (Alipay, WeChat Pay, Paytm, PayPal, etc.), and banks and bank networks (MobilePay, BKM Express, MODO, Paze, etc.).
Cards are still strong, with transaction value rising. In card-dominated markets such as the United States and the United Kingdom, card spending is shifting to digital wallets (e.g., Apple Pay, Google Pay and PayPal). In total, card transaction values are at an all-time high.
A2A payments are not as big in card-heavy markets. Not surprisingly, account-to-account (A2A) payments are increasing in countries like Brazil, India and Poland. But in card-heavy markets like the United States and the United Kingdom, A2A payments have had less success—to the chagrin of merchants who favor the lower cost of A2A payment acceptance.
BNPL continues to have big appeal. Global transaction values for Buy Now, Pay Later (BNPL) grew 18% from 2022-23 to reach 5% of global e-commerce spending, or over $316 billion. BNPL is projected to see 9% compound annual growth rate (CAGR) through 2027.
Global e-commerce growth outpaces POS by more than 2 to 1. Global e-commerce topped $6.1 trillion in 2023 and is growing at more than twice the rate of global POS value, with a CAGR of 9% for e-commerce and 4% for POS over the next three years.
Cash is still cash (wink: speed and anonymity). Despite cash use falling 8% in 2023—with expectations that cash will have a CAGR decline of 6% through 2027—it remains a vital payment tool for consumers, accounting for 16% of global transaction value ($6 trillion).
Prepaid cards will exceed $1 trillion in 2024. The versatility of prepaid cards—as gift cards, reloadable stored value cards, for payroll, business-to-consumer payments, government benefits and as a means help serve the underbanked—is their main appeal. In 2024, prepaid cards will surpass $1 trillion in global transaction value.
Crypto and other payment choices: not so much. Cryptocurrencies, PostPay and PrePay each registered less than 0.5% of global e-commerce transaction value in 2023 at 0.2% (~$11 billion), 0.3% (~$20 billion), and 0.3% (~$17.5 billion), respectively.
Seen and Heard…
Blockchain sleuth Lookonchain strikes again: On Wednesday, it noted on X that a crypto “whale” transferred 12,000 ether (ETH)—worth $39.75 million at the time of the post—to Binance. CoinDesk reported that the ETH transaction amounts to roughly 0.01% of the total circulating supply of the second-largest cryptocurrency by market cap. This was preceded on Tuesday when the same address moved nearly 9,000 ETH to Binance and withdrew 30 million tether (USDT). …Of the 12 Worst Investment Funds Over the Past Decade captured by the Visual Capitalist this week and based on a ranking compiled by Morningstar, ARK Invest has the dubious distinction of holding two spots, one tied to its ARK Innovation ETF, or ARKK, which invests in disruptive innovation including fintech, artificial intelligence (AI) and the “next-generation Internet.” It lost an estimated $7.1 billion in shareholder wealth. …The sale of FTX’s 8% stake in AI startup Anthropic—reportedly worth more than $1 billion—has investors and bankers going bonkers. But Anthropic has ruled out taking Saudi money, due to national security concerns, CNBC reported. Proceeds from the sale of the class B shares will be used to repay FTX customers defrauded by ex-CEO Sam Bankman-Fried, who is scheduled to be sentenced on March 28th.
FINvestments
🦈 Number of the Week: With its sights set on Coinbase and Binance, Figure Markets, a separate company being launched by blockchain-based home equity lender Figure Technologies, raised more than $60 million in a Series A funding round co-led by Jump Crypto, Pantera Capital and Lightspeed Faction, a joint venture with Lightspeed Venture Partners. (Distributed Global, Ribbit Capital, and CMT Digital, among others, also participated in the round.) The San Francisco-based startup intends to use the Provenance Blockchain to develop a single decentralized custody crypto exchange and securities marketplace for investors to trade blockchain-native assets including crypto, stocks, and alternative investments. The “everything marketplace” will incorporate multi-party computation (MPC) wallets to help eliminate the single-point-of-failure risks inherent in centralized exchanges; the wallet’s private keys are distributed across a decentralized network, requiring multi-party approval for every movement, which minimizes counterparty risk and ensures users’ control over their assets.
🦈 Arlington, TX-based Agora Data, an artificial intelligence-driven subprime finance platform for auto dealers, closed three funding transactions totaling $200 million. The funding came from new and existing equity investors, a revolving asset-backed credit facility provided by a global bank, and a new corporate debt facility provided by Phoenix Merchant Partners, Agora Data’s lead investor. Agora Data’s platform enables auto dealerships to extend subprime loans directly to retail auto buyers rather than through subprime lenders, thereby increasing their profits.
🦈 Solaris, the Berlin-based Banking-as-a-Service (BaaS) platform provider, raised €96 million (US$103.7 million) in a Series F funding round led by SBI Group and other existing investors; at the same time, it also secured a financial guarantee of up to €100 million (US$108 million) capital equivalent. The funding will reportedly be used, in part, to fulfill a 10-year contract with Allgemeiner Deutscher Automobil-Club (ADAC), enabling the Munich-based motor club to issue branded cards to its 21 million members. Solaris’ embedded finance platform enables businesses in the travel and mobility industries to provide their own financial services—digital banking, payments (cards), and lending (Buy Now, Pay Later), among other services—through APIs to customers.
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