October 2, 2021 / VOLUME NO. 177
Banks’ Regulatory Advantage

Bankers rarely view regulation as an advantage; in fact, I often hear them refer to compliance as a burden. 

But recently, a public company gaffe involving decades-old securities law made me appreciate the regulation that underpins core banking activities like taking deposits and lending.

Coinbase Global (COIN) is a cryptocurrency exchange that trades on the Nasdaq. In early September, the company announced it was being investigated by the U.S. Securities and Exchange Commission over plans to launch a program where holders of a stablecoin — a digital currency pegged to a fiat currency, making its value stable — could earn interest by lending it to other traders. The regulator indicated that, based on legal precedent, this product constituted a security that needed to be registered. Coinbase co-founder and CEO Brian Armstrong disagreed with this interpretation — which he shared in a company post and in a series of tweets — and complained that regulators hadn’t shared their reasoning as to how this product qualified as a security.

The spat embodies a tension in the financial industry when it comes to innovation. A fintech launches a new and innovative product, only to discover that it falls under a long-established regulatory regime, as Georgetown Law Professor Adam Levitin tweeted in early September.
Source: Twitter
Banks and their strict, highly regulated regime have an advantage here, Bloomberg columnist Matt Levine pointed out recently. Coinbase wants to launch a lending program with customer stablecoins, which is something similar to what banks do with customer deposits.

“A bank account is not a security because the securities laws, ever since they were written in the 1930s, exempt bank accounts,” Levine wrote on Sept. 8. “And the basic reason for that is that banks are subject to banking regulation, which is generally much stricter than securities regulation. You don’t have to file a prospectus, but you do have to meet capital requirements and have bank examiners and all the rest. A bank account is regulated as a bank account, so you don’t have to regulate it as a security.”

It’s no secret that more and more companies think they can do what banks do, only better. They’re coming for customers’ deposits and loans via rates or faster decisions or attractive digital interfaces. But the simple truth is that not every company can function as a bank, and few companies want to be regulated as one — and that is to banks’ advantage.

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