US crypto clampdown promises benefits for Coinbase

Hello and welcome to the latest edition of the Cryptofinance newsletter. This week, we’re taking a look at how the US’s crypto-clean up affects Coinbase.

America’s top markets regulator has decided that most crypto companies can’t be trusted to look after investors’ assets. This is a less-than-shocking conclusion to anyone who’s been following crypto markets over the past year. So, therefore, who can be trusted?

The question is prompted by news this week that the Securities and Exchange Commission is proposing tougher rules on safeguarding assets such as crypto.

It wants investment advisers, who advise mutual, pension and hedge funds and who have access to investors’ money, to use a qualified custodian to protect crypto assets.

It’s the latest salvo as the agency goes after the industry’s biggest companies, whether they survived last year’s bloodbath — like Kraken and Gemini did — or did not.

The motivation this time is to clean up the language crypto companies use when they say customer assets are safe.

“When these platforms go bankrupt — something we’ve seen time and again recently — investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court,” SEC chair Gary Gensler said in a scathing review.

“Make no mistake: based on how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians.”

Qualified custodians need to submit to independent audits and supply officials with key documents, conduct that hasn’t always been a crypto industry strong point. So who stands to gain?

One company is Anchorage Digital, the only crypto bank with a charter from the regulators at the Office of the Comptroller of the Currency. Another is Coinbase, the exchange.

As it is Nasdaq-listed, independent audits and SEC demands for documents are commonplace. In a nice bit of timing this week it also said Coinbase Custody Trust Co was recognised as a qualified custodian by the SEC. Paul Grewal, chief legal officer, said Coinbase was “confident” it would remain so if the SEC’s rules came into effect.

Benefiting from regulation would be a neat turn of fate for a company that has often had a fractious relationship with authorities.

“The bull case would be that Coinbase is by far and away the market leader in terms of brand, but while that’s true it doesn’t make them immune to regulators,” said Chris Brendler, an analyst at DA Davidson.

Just a day earlier Grewal told me the SEC’s “regulation by enforcement approach” to crypto writ large was pushing jobs overseas and leaving Americans behind the curve.

The exchange remains at loggerheads with the SEC on what should be considered a crypto security, and only in January settled charges with the New York attorney-general over poor compliance standards for $100mn.

Even so, there are some parallels with the financial services industry after 2008. Many of the surviving banks and brokers were fined billions of dollars for transgressions but the tougher regulatory barriers made it harder for new entrants to break into the market.

“You could argue Coinbase is one of the only adults left in town,” Ram Ahluwalia, chief executive of investment adviser Lumida Wealth Management told me over the phone. “The most regulated players are the biggest beneficiaries of more regulation.”

What’s your take on Coinbase’s relationship with regulation? Email me your thoughts at scott.chipolina@ft.com.

Weekly highlights

• Late on Thursday the SEC sued Terraform Labs — the company behind unstable stablecoin TerraUSD — and its founder Do Kwon for allegedly arranging a cryptocurrency fraud that led to billions of dollars in losses. “This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws,” said Gensler. Lawyers for Terraform and Kwon did not immediately respond to requests for comment when my colleague Stefania covered the story here.

• While the US continues its blitz against the crypto industry, authorities in the UK appear to want their own (very small) slice of the action. In conjunction with law enforcement, the Financial Conduct Authority took action against operators of unregistered crypto ATMs in Yorkshire. Local police described it as a “national first”. Historic stuff.

• Fresh court filings relating to crypto lender Celsius’s bankruptcy allege former chief Alex Mashinsky and some of his associates profited by secretly selling the platform’s native tokens from their own private wallets. In the space of three years, Mashinsky allegedly sold more than $50mn CEL tokens, often in direct violation of the company’s trading policy.

• The $250mn bond used to secure Sam Bankman-Fried’s bail late last year was described as the largest ever. Freshly unsealed court documents reveal two academics at Stanford University — where the disgraced crypto chief’s parents worked — put up a combined $700,000 to help secure the bail. My colleague Joe Miller in New York has the story here.

• An update on crypto’s hacker underbelly: blockchain analytics company Elliptic published a report indicating Blender.io — a mixing service allegedly used by North Korean hackers to launder illicit goods — has likely re-launched as a new service called Sinbad. I looked at the US efforts to clamp down on North Korea’s illicit crypto regime, but Elliptic’s latest findings show how quickly they regroup.

Soundbite of the week: What good is innovation anyway?

One of my pet peeves in this industry is the claim technology is “neutral”. It is not: every slice of crypto technology carries with it a value judgment on subjects such as privacy, financial inclusion, government over-reach and energy consumption.

Technology is often relieved of moral baggage, but in contrast “innovation” is considered inherently good, often without qualification. At a Senate hearing on crypto this week Lee Reiners, policy director at Duke Financial Economics Center, expertly deconstructed one of the most common retorts to regulatory scrutiny facing the space.

“Another self-serving line spun by crypto boosters is that policymakers must embrace innovation or else the crypto industry will migrate to other jurisdictions with a more favourable regulatory climate, but this implies that innovation is an unmitigated good.

The truth is that innovation is value-neutral, it can be used for good or bad. Instagram for kids is technically innovative, but does anyone think it’s a good idea?”

Data mining: Binance’s big BUSD business

The New York Department of Financial Services this week halted the issuance of BUSD, a Binance-branded stablecoin pegged to the US dollar. Binance’s chief executive Changpeng Zhao tried to distance his exchange from the token, which was minted by another company, Paxos.

During a Twitter Spaces session earlier this week, Zhao said BUSD was “never a big business” for Binance. He even went as far to say he thought the BUSD project might have failed at its inception.

But numbers from data provider CryptoCompare show, in fact, BUSD represented at least roughly a fifth of Binance’s trading volume in the last year.

By December 2022, BUSD accounted for 40 per cent of Binance’s trading volume. That sounds like pretty big business to me.

Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.

Your comments are welcome.