Coinbase, Stablecoins and the Future of the Industry

Targeted by the U.S. Securities and Exchange Commission

Hamburg, 8. August 2023 - The crypto industry is about to enter a seminal phase, with the regulation of stablecoins increasingly in the spotlight. The U.S. Securities and Exchange Commission (SEC) has targeted not only the world’s largest crypto exchange, Binance; but also the leading U.S. platform Coinbase. This development has sparked a lively discussion about regulatory responsibilities and potential implications. In this article, we shed light on the background of this legal dispute, look at the proposed clarity law for payment stablecoins and analyze the upcoming changes for the entire crypto industry. In doing so, we take a closer look at the controversial viewpoints and the potential consequences of these developments.

Legal dispute between SEC and Coinbase: crypto exchanges targeted by regulators

On 06 June, the US Securities and Exchange Commission (SEC) charged Coinbase, the leading trading platform in the US after the world’s largest crypto exchange Binance.The SEC indictment accuses Coinbase of failing to adequately protect investors from fraud and manipulation. The crypto exchange allowed its customers to trade tokens, which are considered securities according to the SEC. Thus, Coinbase acted as an unregistered exchange where trading in unregistered securities took place. This development could have a drastic impact not only on Coinbase, but also on the entire crypto industry.

As a result, the regulatory landscape for digital assets remains on shaky ground. As a result of this lawsuit, Coinbase’s stock price suffered a temporary drop of about 20 percent.The SEC’s demands in the lawsuit against Coinbase go beyond the return of ill-gotten gains and fines — they also include injunctive and other relief.Brian Armstrong, Coinbase’s CEO, revealed in an interview with the Financial Times that shortly before the lawsuit was filed, the SEC had asked the exchange to delist all cryptocurrencies on its platform, except for Bitcoin.

SEC and U.S. Congress in Focus: Regulation of Stablecoins in the Spotlight

Stablecoins play a critical role in crypto markets, providing a stable asset that investors can use to trade in and out of more volatile assets. Global investment bank Berenberg predicts that the U.S. Securities and Exchange Commission (SEC) will expand its enforcement actions to include stablecoins and DeFi protocols. The analysis suggests that the SEC’s focus on stablecoins may be driven by a desire to limit the competitive advantage of unregulated DeFi protocols over regulated lenders and exchanges.

Specifically, the SEC is focusing its attention on stablecoins such as Tether (USDT) and USD Coin (USDC) to level the playing field and minimize associated risks. However, the legal basis for regulating stablecoins is controversial. While government agencies cite the Howey test or the Investment Company Act of 1940 as a reference, industry representatives express criticism of this approach.

Paul Grewal argues that existing regulations are not tailored to the rapidly growing crypto industry — a view that is widely shared. Current laws were written before the advent of the internet and do not consider the dynamics and complexity of the crypto world. This creates uncertainty and inconsistencies that stand in the way of clear and consistent regulation. Jeremy Allaire even goes a step further and states that “the SEC is not the appropriate regulator for stablecoins.” He points out that “there’s a reason why all over the world, including the U.S., governments say they classify payment stablecoins as payment systems and bank-like activity.”

Back on Feb. 23, Allaire agreed with the position of SEC Commissioner Hester Peirce, who had recommended that crypto regulation be left to Congress. There, a long-awaited stablecoin bill is making progress. Despite bipartisan tensions, the bill passed by a vote of 34 to 16, allowing it to move forward in the House of Representatives. The bill aims to establish clear guidelines for stablecoin issuers. The move underscores the growing interest in stablecoin regulation, while the crypto industry is closely watching how this legislation will affect the market.

Impact of stablecoin regulation on Coinbase

The upcoming regulation of stablecoins not only impacts Circle, but also affects Coinbase. The latter company is heavily dependent on interest income from USDC. In the first quarter of this year, Coinbase generated 27% of its net revenue from interest income on USDC. This interest income increased from $32.5 million a year ago to an impressive $201.4 million, offsetting the decline in trading volume. However, the impending regulation of stablecoins could challenge this reliance on interest income, potentially forcing Coinbase to make further adjustments to its business strategy. This would be necessary to meet regulatory requirements while operating successfully.

coinIX’s View

The debate surrounding the regulation of stablecoins is in full swing, reflecting the rapid evolution of the crypto world. As experts and authorities weigh their views, it is clear that regulatory clarity is crucial. It serves to bolster investor confidence and ensure the long-term stability of the industry. The coming months could play a critical role in how the crypto industry evolves and how the regulatory framework is ultimately shaped. We will continue to closely monitor developments and report on the latest findings.

About coinIX

coinIX GmbH & Co KGaA, based in Hamburg, is a listed investment company and has been investing in the broad spectrum of blockchain innovation since 2017. This includes the next level of digitalization in traditional industries, as well as new fields such as decentralized finance (DeFi) or NFT / Metaverse projects.

For this purpose, coinIX invests in equity of startups, early token projects and liquid cryptocurrencies. It offers a listed share that is traded on the open market of the Düsseldorf Stock Exchange.

(WKN: A2LQ1G | ISIN: DE000A2LQ1G5 | Ticker: XCX).