Invest: Coinbase is trying to lead the Crypto regulation, but it’s not going well

Posted by

Last week was not kind for cryptocurrencies. Following the news that SEC rejected crypto lending business, the prices of all major crypto currencies plunged by more than 10%.

Why did this happen? I’m offering a simple phrase as an answer: Crypto regulation.

It is conventional wisdom that big incumbent businesses love regulation. The more complicated and expensive big-bank regulation is, the harder it will be for a new bank to become big. Or in social media, as Byrne Hobart put it, “Facebook wants to be regulated, as long as everyone is regulated based on a standard set by the worst things that happen on Facebook, because that’s a world where Facebook is the only company in the world with the technical capability to host a legal comments section.”

Facebook is a big incumbent but it is not all that long ago, in the grand scheme of things, that Mark Zuckerberg got in trouble at Harvard for breaking college rules with an early prototype. In new business areas, you can move from scrappy disruptor to big incumbent pretty quickly, and then you get to shape the rules.

There is an obvious lesson for cryptocurrency companies. There are some big crypto companies that distinguish themselves by being U.S.-based and by not breaking the law. 

Crypto currencies, especially bitcoin, started as a tool for drug deals and money laundering. But Cloinbase Global Inc became a listed,  law-abiding U.S. public company. This is a huge change. And it proved that a company can be successful with a simple promise of “we will return regulators’ phone calls and check customers’ backgrounds.”

As U.S. regulators figure out how they want to regulate crypto, Coinbase will be on the inside. The U.S. market will be important, and there will be regulations, and they will favor incumbents like Coinbase, which are big and U.S.-based and transparent and already doing stuff like customer checking; smaller or foreign competitors who want to disrupt Coinbase won’t be able to afford all of that stuff and will never catch up to Coinbase. Also, though, as a big respectable incumbent whose brand is about following the law, Coinbase will be consulted on regulation: Regulators need some industry expertise, much of the industry is ostentatiously illegal, so they will naturally turn to the rare ostentatiously legal company in the industry for the expertise they need to write good rules.

All these are very sound strategies, but are they working? The answer is not, at least not working as Coinbase would like them to. One evidence is that Coinbase has to cease the plan to offer a crypto lending product as SEC deem it violates securities laws.

Another evidence is the SEC has a Crypto Rating Council, which has a framework to rate cryptocurrencies in a scale of 1 (definitely not a security) to 5 (appear to be a security). The bad news is that none of the outstanding cryptocurrencies is close to 5.