DWN Op-Ed: Why Are Regulators Trying to Thwart Economic Democracy?


One doesn’t have to be a conspiracy theorist to question whether something untoward is going on at the Securities & Exchange Commission with respect to its recent treatment of fintech companies.

Actions by the Commission that include slow-walking certain fintech-related qualifications, including its sheer unwillingness to approve a cryptocurrency ETF, are just the tip of the iceberg. The latest threats by the SEC to sue cryptocurrency exchanges and its allusions to banning fintech revenue models altogether should have every American deeply concerned – especially when suggestions of such bans come just weeks following an IPO effective date.

This past July, the SEC gave robo-advisor Robinhood the green light to go public. Sounds like a win for fintech, right? Not so fast.

Just four weeks after allowing the financial disruptor to sell its shares to the public, SEC Chairman Gary Gensler told Barron’s that a full ban of Robinhood’s payment for order flow (PFOF) revenue model is “on the table.”  

For those who do not know, PFOF is what enables Robinhood to provide zero-commission trading to millions of small retail investors – many of whom have been shunned by conventional financial services firms because of limited resources and modest transaction sizes. 

But precluding retail investors from commission-free trading is only part of this shameful story.

According to the S1 that Robinhood filed with the SEC, PFOF and transaction rebates represented over 75% of the company’s 2020 revenue, a 62% increase from 2019. In fact, in the first three months of 2021, PFOF and transaction rebates have already grown to constitute 81% of the company’s revenue. 

Cognizant that payment for order flow comprises a considerable and increasingly growing portion of Robinhood’s business, Gensler had to have known that his “on-the-table” remark would send Robinhood’s newly-trading stock into a tailspin. In fact, Robinhood’s stock has yet to reach its pre “on-the-table” trading price.

Regardless of whether one objects to or welcomes the PFOF business model is not at issue here. Instead, what does need immediate addressing is why the SEC would qualify an IPO of a company whose revenue model it is about to obliterate? Was it to give Robinhood’s VCs their exit while retail is once again left holding the bag?  Seethe on that for a moment.

Unfortunately, Robinhood is not the only freshly publicly-traded fintech disruptor that the SEC has it out for. The Commission recently threatened to sue Coinbase, a leading platform for trading cryptocurrencies, over its new Coinbase Lend program which would allow Coinbase customers to earn interest on select assets on Coinbase, starting with 4% APY on USD Coin (USDC).

Crypto lending is not new. Similar products have been on the market now for years, and new crypto lending products are continuously launching without SEC consent. These higher yielding lending products are not evading SEC scrutiny. Rather, there is no guideline within the SEC for these type of crypto lending products. Nor is there anything on record to suggest that these crypto lending products even fall under the SEC’s jurisdiction.

Without explaining how or why, the SEC purportedly told Coinbase that it considers Coinbase Lend to constitute a security and would, therefore, institute litigation should they launch this new product. Even worse, according to Coinbase, the SEC sought the name and contact information of every single person on the Coinbase Lend waitlist. Although Coinbase refused to provide those names, one has to wonder, why on earth would alternative yield seekers suddenly be under the eye of any federal agency?

In America, it is not a crime to seek greater returns or assume investment risk. But can the same be said about investigating investors without just cause? Furthermore, it is simply unamerican to regulate by litigation.

So, what the hell is going on?

For years now, fintech innovation has been unassailably democratizing finance by lowering the barriers to access as well as inspiring higher yielding alternative debt products. Why is the SEC suddenly on the attack?

Every single citizen should be asking why a federal agency, designated to maintain fair and efficient markets, appears to be working overtime to impede the very fintech innovation that furthers both fairness and efficiency.

To be clear, the stated objective of the SEC is “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”

Well, I have news for the SEC. You are failing at your mission.

By attempting to restrict access to higher yielding fintech investment options, you are failing to protect investors from inflationary risk.

By trying to pick (or create) winning and losing business models, you are failing to facilitate capital formation. Instead, you are obstructing it.

But most egregious of all, by denying smaller businesses and retail investors equal access to markets and alternative investment products, you are utterly failing to uphold just securities markets.

The question is why. Why is the SEC trying to thwart the very fintech innovation that fosters economic democracy?

It all comes down to who loses when the “we the little people” win.

The Federal Reserve relinquishes control when alternative lending products are priced with complete disregard of its federal funds rate which presently stands at .08% or 4,900% lower than the new Coinbase Lend product. Furthermore, it is becoming increasingly more difficult for conventional banks, offering .15% on a 1-year CD, to formidably compete against a 4% APY – especially during this era of record high inflation.

No one could argue that the primary beneficiaries of the SEC’s recent anti-fintech actions are the political elite and the financial incumbents that they serve. But are both so fearful of fintech disruption that they have “requested” some sort of a clamp down on fintech innovators?

Taxpayers deserve immediate answers.