Plus China’s Newest Stock Exchange
Welcome to your Sunday digest…my weekly breakdown of the things we’re thinking about and talking about in the Global Intelligence world.
First up, panic at the Securities and Exchange Commission…
There’s an old joke (but not really a joke). You’ve probably heard it before: How do you know when a politician is lying? His mouth is moving.
Well, an alternative version of that popped into my head this week when I was reading a news story. My new take goes: How do you know when the SEC is panicking? When it won’t talk.
The story in question had to do with Coinbase, the largest cryptocurrency exchange in the U.S.
Apparently, the SEC is threatening to sue Coinbase if the crypto exchange pursues its plan to launch something called Coinbase Lend.
Basically, Coinbase wants to build a lending pool focused on U.S. Dollar Coin—a cryptocurrency stablecoin that’s pegged to the U.S. dollar.
Under the plans, Coinbase users who contribute to this pool would receive a 4% annual yield on their USDC. Coinbase would profit by then lending out these assets to borrowers at higher rates.
According to Coinbase CEO Brian Armstrong, the company reached out to the SEC about these plans.
Coinbase claims that the SEC replied by saying the product was a security, but it refused to explain to the company how it came to that conclusion.
The company has since said that the U.S. regulatory agency has refused to engage on this issue and instead sent what’s known as a Wells notice, which is a warning of a potential lawsuit.
To me, the key point about this story is not the lawsuit, but the SEC’s silence.
I’ve been reporting on the SEC for decades and I struggle to remember it ever being quiet about securities matters. And now, suddenly, it has nothing to say about one of the biggest financial issues of the moment…
Yeah, that’s not sketchy at all.
The reality is that products like Coinbase Lend already exist all across the cryptoconomy.
Right now, there’s literally billions and billions of dollars locked up in a variety of similar products. They’ve exploded in popularity because they offer savers a real rate of return on their cash. Meanwhile, borrowers get easier access to capital at much lower fees.
Personally, I would argue that Coinbase Lend—and other such products—is not a security for the very simple reason that returns on deposits are not linked to the company’s overall performance.
The SEC seems to have a different position. That’s fine, but if so—speak up, SEC. What’s your case?
The agency’s seeming unwillingness to engage with Coinbase and explain its position indicates to me that it’s flailing about as crypto advances faster than lawmakers and regulators can move.
Crypto saving and lending products are the future of finance.
They are a better deal for borrowers and a better deal for savers. They are poised to undermine the entire traditional financial industry. And the SEC has no idea how to respond…which explains the silent treatment.
What it should be doing, of course, is working with relevant companies to regulate this space, and listening to what the companies and the crypto experts have to say in helping lawmakers shape the rules by which crypto will play. For now, however, it seems to be burying its head in the sand.
Ultimately, traditional finance is dead man walking, and suing Coinbase will not change that reality.
Next up…a related topic that underscores my point: The traditional banking sector is leaving small-business owners in the lurch.
Since the start of 2021, the top 25 banks in the U.S. have set new, all-time lows in lending money.
You may be wondering why this is the case…
Well, even though the stock market is hovering new record highs, the big banks know which way the wind is blowing.
They’re increasingly concerned about a market crash and are busy preparing for a downturn by buying up Treasuries and building their cash reserves. This means they have less cash to lend.
So basically, the traditional banking sector is imposing a credit crunch on borrowers. This is badly affecting small businesses, just as they try to emerge (and are still suffering) from the pandemic.
Taking us back to our last story, this explains why more small businesses are turning to decentralized finance, or DeFi, for their borrowing needs.
Often when I mention decentralized finance—saving, borrowing, and other financial services conducted using crypto technologies—people are incredulous…and particularly about the borrowing.
“What business owner would borrow from a crypto-bank?” That’s a common refrain I hear.
But in this credit environment, is it really a surprise that small-business owners would turn to the cryptoconomy? Particularly when DeFi is so much more efficient than traditional banking.
DeFi lenders use something called smart contracts. These are basically computer programs that activate automatically when certain conditions are set.
These enable DeFi “banks” to operate without credit checks, loan officers, or any of the other middlemen that clog up traditional banking and make lending tedious, expensive, and time-consuming.
DeFi means fast loan approvals and much lower fees.
Of course, you have to take precautions when borrowing against crypto, like, for instance, buying crypto insurance for your loan collateral.
But with traditional banks turning away borrowers, don’t be surprised if more and more small-business owners choose the DeFi route for their lending needs…
Finally, this week we end, as we often do, with a story on China.
Recently, the country’s all-powerful leader, Xi Jinping, announced plans to launch a new stock exchange. The new exchange is set to be based in Beijing and focus on small, innovation-centric tech companies.
The launch of the Beijing Stock Exchange comes after Chinese regulators started cracking down on local companies, and particularly tech businesses. This has included sanctioning Chinese tech giants, ostensibly for listing in the U.S.
By opening this new exchange—which is in fact a restructuring of an existing platform called Beijing’s National Equities Exchange and Quotation market, or NEEQ—China’s leaders hope to show that there’s enough capital in the domestic market to support the rise of new, locally grown tech giants.
Personally, though, I’m not convinced.
This is an inherent contradiction at the heart of modern China.
In many ways, China remains a distinctly socialist country, with the Communist Party and state-controlled enterprises exerting ultimate power over the economy.
At the same time, however, China owes its growth to an eager embrace of capitalism among ordinary people.
Those two systems have been able to coexist due to China’s industrial-focused economy. Top-down state control of a capitalist economy is relatively easy when your main business is basic manufacturing.
But can these two facets of China continue to coexist in a technology-focused economy?
Can technological innovation prosper in a society where the state demands near-total control of capital and ideas?
And will Chinese investors really risk their money on tech businesses, when the Communist Party has consistently demonstrated its willingness to crush innovative enterprises without warning or any real provocation?
Honestly, I don’t know the answers to those questions. But how they shake out will be key to shaping the rest of this century…in China and beyond.
That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, please reach out through the contact form on the Global Intelligence website here. I’d love to hear from you.
Enjoy the rest of your Sunday.