Coinbase and the SEC © Bloomberg 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.” | 
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