How to solve the cryptocurrency definition debate and save Coinbase

It all depends on whether you can prove cryptocurrency is neither gold nor stocks

Samir

Aug 01, 2023

Full post:

Hear me out fintech nerds - I think all of @coinbase's problems could be solved if they just moved from being a:

a cryptocurrency exchange »» a crypto currency exchange

They could avoid regulation, keep their business model intact & maybe even make more money. Intrigued? Read on.

First, you need to understand what Coinbase is. Coinbase is a cryptocurrency platform. Users can buy, sell, and trade cryptocurrencies with each other (i.e. an exchange/market). Its business model relies on transaction fees.

The big deal today - what is a cryptocurrency? Today, the SEC and Coinbase disagree on what Coinbase is actually selling - what actually is a cryptocurrency. That definition determines how crypto is regulated and if it can work in US.

So what's the difference?

The SEC says cryptocurrencies are "securities." / investment contracts. They say investors expect profits from effort of others so cryptocurrencies apply (like stocks). On the other hand, Coinbase says cryptocurrencies are commodities so they don't apply (like gold).

But what if it's more simple?

What if cryptocurrencies aren't like stocks (SEC definition) OR like gold (Coinbase's definition)? What if, and this is going to sound crazy, but: What if cryptocurrency is... a digital currency? (I hope my snark conveys that this actually feels really obvious).

It's pretty easy to make this case. Everyone understands cryptocurrencies this way - remember the infamous pizza for bitcoin story? The dude wasn't taking stocks/gold for pizza, it was digital money. And you can already buy stuff with crypto on payment cards. Sounds like money to me.

So perhaps cryptocurrency is generally accepted as currency, but I'm sure you're wondering about the regulatory environment here. Let's go to Bard/ChatGPT for that:

You know who definitely doesn't regulate currency? The SEC (Securities Exchange Commission).

So maybe cryptocurrency could be currency and free from many regulations, but what about Coinbase's business model? Surely they can't have a marketplace for digital currencies allowing users to trade directly with each other?

Fam - others have been doing it since 1999!

Now it looks like Coinbase is free from regulation and their business model is intact. Did you also say there might be more money in the mix?

Well today, Coinbase charges 1% fee on transactions as a commodity platform:

Other digital currency platforms transaction fees:

PlayerAuctions: 5%
G2G: 5% - 10%
AAPL/MSFT/GOOG: 20-30%
Roblox: 30% (?!)

You're welcome Coinbase!

But I know some may dismiss it all and say currencies would still be regulated, by FOREX regulations.

Maybe so, but the above argument mostly still holds:

The NFA (National Futures Association), not SEC, would regulate transactions
Regulations are simply capital requirements, leverage limits & funds segregation, rather than the onerous registration and compliance requirements that make Coinbase feel the need to leave the US
There are no particular caps on fees or the types of products you can issue

Of course, if they were a crypto currency FOreign EXchange, they'd likely need to go through OTC markets which may be subject to some additional complexities and perhaps some, light, regulation. But it's a decentralized market - I'm sure they’ve learned a thing or two about decentralization, right?

Okay so this could be a good approach so why hasn't Coinbase tried it?

I honestly don't know - this is now where I ask the audience. Any ideas? Maybe they've set a precedent so they're going with it? Maybe it's philosophical - bitcoin was originally digital gold? Paging Paul Grewal?