In the wake of high-profile bankruptcies and regulatory actions that have left the cryptocurrency lending industry reeling, Coinbase Global Inc. is stepping in to fill the void.
Through its Prime service, the U.S.-based exchange aims to attract institutional investors with a lending platform under a Regulation D exemption, as per a recent Bloomberg report.
While critics debate whether Coinbase’s move is brave or foolhardy, its foray into the space seems timely, especially after its earlier misadventures in retail lending and regulatory tussles.
Coinbase is seeking to fill the lending void left by the likes of Genesis Global and BlockFi https://t.co/sEgmMV73Ch
— Bloomberg Crypto (@crypto) September 5, 2023
A second attempt at lending: Targeting institutional investors
Coinbase is not a stranger to the lending market. The exchange had previously launched a service called Coinbase Borrow, targeting retail customers by offering loans secured by Bitcoin.
However, this was halted in May. Despite its earlier missteps, Coinbase seems eager to venture back into the lending space, but this time the focus is on institutional investors. According to a recent filing with the U.S. Securities and Exchange Commission (SEC), customers have already poured $57 million into the new lending program through Coinbase Prime, a platform designed for institutional trading and custody services.
Regulatory challenges: Walking a fine line
While Coinbase is diving back into lending, it’s doing so in an environment increasingly scrutinized by regulators. This past June, the SEC charged the company for unregistered offers and sales of securities through its staking-as-a-service program.
This led to a group of U.S. states demanding the cessation of these services. The fact that Coinbase’s new lending program qualifies for a Regulation D exemption may offer some reprieve, but the crypto giant still finds itself walking a fine regulatory line.
The regulatory challenges are not unique to Coinbase. Bankrupt crypto lenders such as Celsius Network, BlockFi, and Genesis Global faced crippling regulatory issues alongside risky bets that failed to pay off.
While BlockFi’s bankruptcy led to a court-approved $297 million return to customers with non-interest-bearing accounts, Celsius is advancing its proposal to exit Chapter 11 as a new entity owned by its creditors. Further, Genesis Global, which fell under the umbrella of Digital Currency Group, is currently under Chapter 11 bankruptcy protection.
As if regulatory scrutiny was not enough, Coinbase also has to grapple with operational issues. Its recently launched layer-2 network, known as Base, suffered a nearly two-hour outage earlier this month. While the issue was eventually fixed and attributed to internal infrastructure problems, such incidents could dent investor confidence, mainly when a significant amount of money is at stake.
Coinbase's Base chain just had its first major outage, lasting for 43 minutes. Blocks have just started to be produced again.
Another reminder that using Ethereum L2s (e.g. Arbitrum One, OP Mainnet, zkSync Era, Base) is NOT the same as using Ethereum mainnet, which is more… pic.twitter.com/JbUNQUGNwu
— Matt Willemsen (@matt_willemsen) September 5, 2023
A risky bet or a timely move?
Coinbase’s venture into the crypto lending market, which has seen a recent spate of bankruptcies and increased regulatory scrutiny, undoubtedly represents a significant gamble for the company. Critics are questioning the prudence of such a move in a precarious landscape. Still, there’s another way to see it: as a strategic play to position Coinbase as a stable, compliant cornerstone in a market yearning for just that.
Substantial institutional investment has already flowed into the new lending program, with filings indicating that $57 million has been committed thus far.
This suggests the institutional sector is ready to extend a certain degree of trust to Coinbase’s latest undertaking.
According to experts, while it remains to be seen if this trust will yield favorable outcomes for investors, one thing is clear: Coinbase appears undeterred by the daunting challenges of market volatility and regulatory uncertainty.
and then