Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
Coinbase's Brian Armstrong (left) and Ripple's Brad Garlinghouse (right) share an enemy in the SEC.

The crypto industry vs. the SEC

Brian Armstrong and Brad Garlinghouse

Hello and welcome to Protocol | Fintech! This Friday: Coinbase and Ripple face a common foe, James Baldwin's lesson for fintech, and Sheila Bair on payment for order flow.

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The Big Story

A crypto united front?

A dispute between Coinbase and the SEC over crypto lending triggered an intriguing response from another fintech company that's been embroiled in its own legal fight with the federal regulator: Ripple.

In response to Coinbase CEO Brian Armstrong's 21-tweet thread, Ripple CEO Brad Garlinghouse playfully posted a Bruce Willis GIF with the caption, "Welcome to the party, pal!"

But he followed up the tweet with something more serious: a call for a united front against the SEC's "warfare on crypto."

"We're ready to work with responsible actors, pro-innovation members of Congress, and others in paving a path to clarity and certainty with U.S. regulators," Garlinghouse said.

Is it a currency or a security? The Coinbase-SEC battle turned the spotlight on the longstanding debate about the crypto industry: Should cryptocurrencies be viewed as currencies or securities?

  • Coinbase maintains that its planned Lend product, which would let customers earn interest by lending their USDC stablecoins to verified borrowers, is not a security. But Coinbase said the SEC disagreed, and threatened to sue the company if they move forward with the new offering.
  • The SEC has not commented publicly on the controversy, even after Coinbase essentially accused the federal regulator of fuzzy reasoning and heavy-handed tactics.
  • In his Twitter thread, Armstrong complained that while Coinbase has tried its best to work with the SEC, the agency "instead subpoena[ed] a bunch of records from us (we comply), demand[ed] testimony from our employees (we comply), and then [told] us they will be suing us if we proceed to launch, with zero explanation as to why."

Asking permission has its own costs. The dispute highlighted a key criticism of the SEC — that it does a terrible job explaining its decisions and policies, and instead resorts to threats of legal action or actual lawsuits.

  • Top Ripple execs joined the conversation by relating the company's experience with the SEC. The agency sued Ripple in December, arguing that its XRP token is not a currency but a security and therefore subject to the commission's regulations.
  • The unexpected move surprised the crypto world. Coinbase subsequently suspended trading in XRP, whose value dropped dramatically. "We are told to engage w/ the SEC in good faith … and what do we get? Enforcement actions (or threats of them) with no clarity," Ripple general counsel Stuart Alderoty tweeted Wednesday.
  • Armstrong suggested Coinbase may take the SEC to court, arguing that "regulation by litigation should be the last resort for the SEC, not the first." And that echoed what Garlinghouse said: "Thankfully today many recognize the havoc caused by regulation by enforcement."
  • A Ripple spokesperson said there are no formal talks between the two companies on their SEC issues. Coinbase had no comment.
  • Stephen Diamond, a business law professor at Santa Clara University, said a Coinbase-Ripple alliance wouldn't be surprising. "Crypto is relatively young but it is typical to form lobbying efforts for certain industries, especially when they know regulators are paying close attention," he told Protocol.

But the "attacks on the SEC are unusual," Diamond also said. And the combative tone suggests Coinbase is gearing up for battle. Garlinghouse is signaling that he'd be a willing ally.

"If you want to go fast, go alone," he tweeted. "If you want to go far, go together."

— Ben Pimentel

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From Protocol | Fintech

El Salvador bungled its bitcoin debut. The bold experiment by the Central American nation to remake its economy around cryptocurrency had a rocky launch.

Affirm has traders buying now. The company posted strong results as "buy now, pay later" plans continue to attract consumers. The stock surged.

Facebook's crypto chief spoke to Protocol. David Marcus outlined to David Pierce how the social networking giant plans to reinvent money.

PayPal is buying Paidy. The payments giant is acquiring the Japanese "buy now, pay later" company for $2.7 billion.

Overheard

  • "By allowing market makers to attract order flow with a lawful bribe, not a best price, [payment for order flow] gives them every incentive to hide the true price at which they are willing to trade, probably leading to poorer executions for retail traders." Sheila Bair, a former chair of the FDIC, on the practice Robinhood profits from.
  • "The minorities that are in cryptocurrency, we've gotten to a place where we are willing to take a risk on technology and we're taking technology over the actual system."Joshua "Tipz" Richardson, CEO, New Black Wall Street LLC.
  • "We've got regular people who are in this product, who see hope in this product, and this space is not regulated."Michael Hsu, acting Comptroller of the Currency, discussing his cautious approach to crypto.

3 Questions With …

Jason Lee, CEO, DailyPay

What fintech trend is most troubling for you?

Payday lending masquerading under the guise of "fintech." On-demand pay has emerged as a safe alternative to predatory payday loans and the vicious cycle of borrowing and accumulating debt, but as with any new industry, there are companies masquerading as legitimate providers while employing tactics that are traditionally used by payday loan lenders. These wolves in sheep's clothing have relabeled their interest as "tips" and "membership fees" while marketing their loans as "cashouts" and "extra cash." Fortunately, regulators are taking notice and action ー loans in the amount of earned wages aren't the same as access to earned wages.

What's been your biggest professional blunder and how did it help you?

Early in my career, I didn't recognize the value of building and investing in teams and culture rather than just the product. I quickly learned that everything begins and ends with people, and your product is only as good as the people who build it. Now, my philosophy is to "build generationally" by focusing on investment in talent and putting the team first.

What fintech company have you been most impressed with this past year?

I've really enjoyed following MoCaFi, which seeks to provide banking services to underserved communities, eliminate predatory financial services and offer resources like access to credit-building tools and financial literacy programs. Sixty years ago, James Baldwin described "how extremely expensive it is to be poor." Since then, big bank "innovations" like overdraft have only made it more expensive. Finally, we are seeing fintech offer real solutions that promote financial equity and inclusion.

Need to Know

  • Walgreens launches bank accounts. The pharmacy chain is partnering with InComm Payments for the bank account. A Mastercard debit card called Scarlet is issued by MetaBank.
  • Quicken's been sold again. Aquiline Capital Partners is buying a majority stake in the personal finance company. HIG Capital bought the personal money-management software business from Intuit in 2016.
  • SEC delayed a bitcoin ETF decision again. The agency now says it will decide on approval of VanEck's application by Nov. 14.

Making Moves

  • Former regulators are joining crypto firms. From Jay Clayton to Chris Giancarlo to Brian Brooks, crypto firms are snapping up ex-regulators. The latest: Brian Quintenz, formerly a commissioner on the CFTC, is joining crypto firm Andreessen Horowitz as an adviser on crypto. As our colleague Biz Carson put it, "Is anyone not a partner at a16z at this point?"
  • Meanwhile, CFTC Commissioner Dan Berkovitz is resigning. That leaves the five-person commission, which regulates derivatives, evenly split with one Republican, one Democrat and three vacant spots.
  • Brian Shroder is Binance US's new president. He's a former executive overseeing Asia for Uber and Ant Group. Any bets on how long he lasts?

Deal Flow

  • Varo Bank is valued at $2.5 billion. The digital bank, which obtained a bank charter last year, raised $510 million led by Lone Pine Capital.
  • Scalapay grabbed another $155 million. The Irish "buy now, pay later" startup's funding was led by Tiger Global.
  • Nuula raised $120 million. The Toronto startup, which monitors cash flow for small businesses, had Edison Partners lead the round.

Data Point

10,500

That's the number of bitcoins mined this year by five U.S.-listed mining companies, which have benefited from reduced Chinese competition amid that country's crackdown, per the Block.

Thanks for reading — see you Tuesday.
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