Fintech: scrutiny at Coinbase and Block comes amid bank wobble

It has hardly been a banner couple fortnights for traditional US banking. But life looks no easier for businesses tipped to disrupt the financial services industry by intention rather than by accident.

Brian Armstrong, the outspoken founder and chief executive of Coinbase, on Wednesday said the listed crypto exchange is the subject of a Securities and Exchange Commission investigation. Coinbase has held itself up as a beacon of respectability in crypto, pointing to its public listing and the accompanying rules and scrutiny that invites.

At the same time, Jack Dorsey’s Block finds itself in the crosshairs of another method of accountability. The short-selling firm, Hindenburg Research, has accused Block of exaggerating user metrics and the marketing costs of its CashApp money transfer unit. Hindenburg added that a core customer included criminals using CashApp for wrongdoing. Block has denied wrongdoing.

Coinbase must first cope with the crypto winter. Declining prices of digital currencies led to plummeting trading volumes on the exchange’s platform in 2022. Commensurately, the company’s transaction revenue fell by two-thirds last year, relative to 2021. Its stock price has dropped 80 per cent from its peak.

Block’s market capitalisation has dropped by about the same amount from its own high. It earns revenue from fees paid on CashApp transfers, and also its buy-now-pay-later business, Afterpay. It acquired this as well from fees on customer bitcoin transactions. Both Block and Coinbase are unprofitable on a net basis because of heavy spending on overhead, technology and marketing.

Coinbase faces a novel and genuinely interesting question: do its lending offerings constitute securities? Block may well offer a better customer experience than a traditional bank but its compliance is now under the spotlight. At this time of economic turmoil, coping with rule books seems to be particularly hard for financial services companies with newfangled business models.