The SEC vs Coinbase

This is an audio transcript of the FT News Briefing podcast episode: The SEC vs Coinbase

Marc Filippino
Good morning from the Financial Times. Today is Friday, September 10th. And this is your FT News Briefing.

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Marc Filippino
A new poll shows a majority of economists think the Federal Reserve will tighten monetary policy more aggressively than the US central bank has been projecting. Meanwhile, the European Central Bank has announced plans to tighten its monetary policy. And in China, clouds are darkening over one of the country’s biggest property developers. Plus, the cryptocurrency world is watching closely as Washington takes on the big crypto exchange, Coinbase.

Stefania Palma
We’re standing in the middle of a moment of reckoning for an industry that has been able to grow quite quickly without much of a strong supervisory role from regulators that are trying to catch up as quickly as possible.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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Marc Filippino
Nearly three out of four leading economists believe the Fed will raise interest rates by a quarter of a percentage point in 2022 in response to higher inflationary pressures. This is according to a survey of 49 academic economists conducted by the FT and the University of Chicago’s Booth School of Business. The results suggest a much more aggressive approach to tightening monetary policy than the Fed’s most recent projections and market expectations. One out of five economists in the survey expect the move to come in the first six months of next year. Back in June, the Fed said that it will raise interest rates in 2023 at the earliest. A majority of economists polled also expect the Fed to soon reveal its plans to taper its bond buying programme and wrap up the process by next year.

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Marc Filippino
So when is a taper really a taper? Yesterday, the European Central Bank announced it would slow the pace of its pandemic asset purchase programme, meaning it’ll buy fewer bonds. So now you’ve got the Federal Reserve talking about tapering and the Bank of England is talking about it, too. The ECB’s move — is that technically also a taper?

Martin Arnold
This is the most interesting question at the moment.

Marc Filippino
That’s the FT’s Martin Arnold.

Martin Arnold
Christine Lagarde, its president, said no. She said in a quote, very similar to one that was made famous by Margaret Thatcher, the former British prime minister. She said “the lady isn’t tapering.” And the reason that she can say that is because the ECB is expected to continue buying bonds all through next year and even into 2023, whereas the other central banks are starting to reduce their purchases down to zero. The ECB says all it’s doing at the moment is recalibrating the pace of its purchases, but it’s not signalling that they’re going to go down to zero any time soon.

Marc Filippino
Martin Arnold is the FT’s Frankfurt bureau chief.

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Marc Filippino
Government regulators around the world are trying to wrap their heads and rules around cryptocurrencies. There have been various crackdowns and now in the US, regulators are going head to head with one of the biggest cryptocurrency trading platforms, Coinbase. And global regulators are watching. To talk more about this, I’m joined by Stefania Palma. She’s our US legal and enforcement correspondent. Hi, Stefania.

Stefania Palma
Hi, Marc.

Marc Filippino
So briefly, Stefania, to help people catch up who haven’t been following this daily drama, what does Coinbase do and what did it do to make the SEC, the Securities and Exchange Commission, threaten to sue?

Stefania Palma
So essentially, Coinbase is a cryptocurrency trading platform. It’s one of the biggest in the US. And essentially earlier this week, a couple of its executives said that the SEC had warned them that if they launched a new digital asset lending product that’s called Lend, the SEC was going to sue them. And in addition to that, the regulator had also issued subpoenas to Coinbase to provide it with more information.

Marc Filippino
OK, and what was Coinbase’s response?

Stefania Palma
So essentially, some of its senior executives just took to the web to share this news. The co-founder of the platform took to Twitter to basically go on a bit of a rant and expressed some frustration in terms of their own relationship with the SEC. And the fact that, according to to Coinbase, it was not very clear how the regulator was going to assess these new products and that therefore they were caught sort of a bit by surprise by this quite aggressive move by the regulator. And that’s sort of what kicked off the whole news cycle around this latest move.

Marc Filippino
So it it kind of sounds like they were blowing off steam because, and correct me if I’m wrong here, there’s not a ton of explicit direction that these companies can follow from the SEC, right?

Stefania Palma
Yes. And I think that’s one of the points that a lot of the the experts that we spoke to point to. To the fact that there still is little concrete guidance for these crypto players in terms of how to navigate regulation. But on the other hand, it is also fair to say this is all very much sort of new products. And US regulators, as well as regulators all over the world, are kind of scrambling and playing catch up to some degree in terms of trying to figure out how best to supervise these new companies and the new products that they’re coming out with.

Marc Filippino
Now, we should mention that Gary Gensler, the chair of the SEC, has had cryptocurrencies in his crosshairs for a while, basically since he took on his position. You know, just last week, he told the FT that cryptocurrency trading platforms couldn’t last long outside the US regulatory framework. How does this warning towards Coinbase play into that?

Stefania Palma
I think people in the crypto industry are very much aware of the fact that Gensler is not afraid of being very vocal about the risks that he sees in this industry. I mean, he has signaled already very serious concerns over consumer protection in this market, which is called a wild West that is rife with fraud, scams and abuse. And he’s already called on also Congress to give regulators more explicit authority to monitor these exchanges. And again, in the interview you just talked about with the FT last week, he also was quite disappointed with the response from crypto players after he was urging them basically to register with the SEC and he essentially said that some of these platforms are, quote, begging for forgiveness rather than asking for permission. So he really has come in to the SEC bringing in quite a strong approach to this new market, which has again ballooned. And I think his own moves also carry sort of additional weight also because he taught a course on this exact subject at MIT. He’s recently also testified on crypto and other issues before the European Parliament. So I think we’re standing in the middle of a moment of reckoning, I think, for an industry that for quite some time has been able to grow quite quickly without much of a strong supervisory role from regulators that are now are trying to catch up as quickly as possible.  

Marc Filippino
Stefania Palma is the FT’s US legal and enforcement correspondent.

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Marc Filippino
There is a company in China that has the dubious honour of being the most indebted property developer in the world. It’s called Evergrande. It’s huge and it’s borrowed a lot. Now, this very indebted company is in trouble. So if you’re a bondholder who’s invested in Evergrande, either in China or on global markets, you are looking at the spectre of this massive company defaulting.

Thomas Hale
It’s actually quite hard to imagine what the worst case scenario would look like.

Marc Filippino
That’s the FT’s Shanghai correspondent, Tom Hale.

Thomas Hale
A bad scenario would be a default from Evergrande, which it warned over last week on which rating agencies seem to think it’s probable that it will happen. If that did happen, a very bad scenario resulting from that would be that the many, many other property developers in China that rely on international bond markets and domestic bond markets in China to borrow, to buy land, to build apartments and other properties, that they would no longer be able to borrow. And that could trigger huge refinancing problems for other developers.

Marc Filippino
So given these risks, we’re now hearing reports that the central government is going to step in. Regulators agree to renegotiate payment deadlines, relax the rules. I mean, all of this seems like Beijing recognises Evergrande is as being too big to fail, Tom.

Thomas Hale
Yeah, I think in the absence of a direct bailout, there there was never any doubt over whether the government would be involved in some way, shape or form. Precisely because, as you say, it’s a company with such obvious systemic importance, with so many potential ripple effects both within and outside of China. And of course, they have hundreds of ongoing projects to to build apartments across hundreds of cities in China. But the real question for international investors is whether the particular solutions that Beijing and Evergrande come up with involve saving their investments or not.

Marc Filippino
That’s the FT’s Shanghai correspondent, Thomas Hale.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Fiona Simon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from Gavin Kallmann, Michael Bruning and Persis Love. Theme song is by Metaphor Music.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible