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As TikTok and Coinbase face regulators, some questions are simpler than others

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Image Credits: Nigel Sussman (opens in a new window)

We learned last night that the U.S. Securities and Exchange Commission served Coinbase with a Wells notice, a prelude to taking enforcement action against the U.S. crypto giant over potential “violations of the federal securities laws.” The company intends to put up a fight, according to its CEO.

Separately, the CEO of TikTok, Shou Zi Chew, is expected to testify in front of Congress this morning. The stakes for the social media service are high. The app has engendered concerns across the U.S. political spectrum, including allegations concerning data security, user privacy and potential meddling by a foreign government.

The Biden administration wants the app’s parent company to sell it so that TikTok can have ownership in a different country under a different code of law. The Chinese Communist Party doesn’t want it to sell. Chew is stuck in the middle.


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That well-known tech products are in regulatory crosshairs should not surprise.

The aggregated value of crypto assets is north of $1 trillion, lots of consumers are involved and Coinbase is a leading company in a market that has evolved faster than its regulatory oversight.

TikTok is incredibly popular in the United States but suffers from sour relations between China, where its parent company is based, and the U.S. economy that generates a large chunk of its revenue. Even worse for TikTok, it has, at a minimum, operated in a manner in the past that has directly undercut its ability to claim that it is benign.

It strikes me how distinct in substance the Coinbase and TikTok matters are and also in how we should feel about them. In case you are in a hurry, TikTok has failed to earn the sort of trust it requires to operate in its current form and should not be allowed to continue to do so. Coinbase, in contrast, is a far more sympathetic company to consider. Let’s talk about it. (To be clear, this is my thinking out loud about these issues, not my speaking for TechCrunch as a whole.)

TikTok

As a capitalist, my default perspective on any particular business action is neutral. I presume that whatever choice is being made is for business reasons and scoot along to something else. Sure, as a consumer in a capitalist economy, I can get annoyed at certain business practices at times. The fee-pocalypse of modern banking, airlines becoming exercises in frustration, that sort of thing.

All the same, capitalism, in my view, leads to superior resource allocation over time and, with proper government taxation and regulation, can power a society where living conditions steadily improve.

Those are my priors. Given them, when a business from a different country does well in the United States, I don’t get too mad. After all, many American companies do business abroad, and that’s fine with me as well. Even more, I expect that when it comes to other countries in which American concerns do business, we should similarly allow companies from that polity to compete, lose and win in our market. We’ll lose some, we’ll win some, from a national-business vantage point, but that’s the game.

Basically, none of what I just said applies to TikTok. The business rules in China for American companies differ from those for Chinese companies in America. This is why TikTok is kicking ass in the United States, where we enjoy a free economy, and why Instagram isn’t allowed in China.

Even still, I am not in favor of blanket bans of companies and services from countries with authoritarian governments. Few of us really are. To take such a perspective would require, to pick an example, an end to business with Saudi Arabia. So when TikTok took off, I hoped it would play nice with American consumers and challenge American companies to do better.

Two main challenges arose for TikTok as it went from a popular app to an incumbent social media service and a mass driver of culture and commerce in the United States. It needed to:

  1. Prove it was a good steward of foreign user data, both in terms of how it used the information and what it shared — or did not — with the Chinese Communist Party, our geopolitical rival.
  2. Prove it would be trustworthy regarding its influence as an application with great reach into American households.

(After writing to this point, I realized that I broke down TikTok’s test points along similar lines as Noah Smith, whom I do read, and should credit with a portion of my thinking on the TikTok matter.)

Sadly for my capitalist bona fides, TikTok has failed both tests. Recent news regarding how the company has stored data from Indian users implies that the company cannot be trusted to be a good steward of user data. And because the Chinese government can request data from its domestic companies, and TikTok is owned by one such concern, we cannot presume that stored data is, in fact, secure.

On the second test — please keep in mind that we are collecting merely certain examples, not an exhaustive list — there are many articles detailing just the sort of thing that has TikTok’s government antagonists worried.

If TikTok cannot be trusted with data due to its parent company’s location, and its parent company’s home market doesn’t allow for a similar competitive landscape as ours does, then I don’t see any reason why we have to allow it in the country. I retain my general bias toward letting businesses compete, but in this case, we don’t have to merely lean on principle; we can use critical thought.

Coinbase

Here, things get stickier. On the one hand, yes, some voices in the cryptocurrency market appear to deem any attempt by the government to regulate their world as some sort of cosmic imposition. On the other, Coinbase has generally done a good job — and doubly so when compared to some of its international rivals — of operating a trustworthy business.

I’ve chatted with Coinbase’s CEO in the past and covered its market, its public-market debut and resulting earnings reports. Heck, when I was working to better understand the NFT market, I used Coinbase as the place where I put around $50 onto the blockchain to get a toehold in the digital asset world. (Note: I hold no material crypto assets but probably have two digits worth of ETH and Bitcoin spread across various accounts that I used to test things over time.) I chose Coinbase because it felt like the safest and most regulated place to transact.

This is a good chunk of the argument favoring Coinbase in its new dustup with the SEC. Tweets from backers and supporters struck the following tone:

Does any of that matter? Maybe, maybe not. While we’re at the start of the current argument between the SEC and Coinbase, it appears to involve staking, which is not a simple question of corporate character.

Staking is a crypto-related term for locking up some of one’s digital assets in return for some sort of reward. It’s a bit like a certificate of deposit, if not precisely. For an example of how staking is more than just locking up assets in hopes of a return, the Ethereum blockchain moved from a proof-of-work (compute intensive and thus carbon spewing) to a proof-of-stake model (staking became the way for its network to reach consensus) recently. Staking ETH can generate returns, yes, but it also helps form the infrastructure that the Ethereum blockchain now runs on.

So, staking is a way to generate financial return but also more than that.

The SEC has taken action against staking when it was offered as a service by centralized companies. Kraken, a Coinbase competitor, ran into this issue. If I understand the nuance correctly, by offering a service to users to facilitate staking, Kraken, in the eyes of the SEC, created a securities product. Coinbase’s argument, again, as best as we can tell at this early juncture, is that it merely offers users the ability to stake their digital assets, which it views as not a securities-related activity.

Exactly how the SEC thinks Coinbase may be violating the rules will help us determine what course of action makes the most sense. We’re going to learn more. But while regulatory action against TikTok feels rather simple, in the case of Coinbase, we’re stuck in the middle of something with far more gray area. This is why the posture of the SEC seems punitive. Naturally, we’re not privy to what Coinbase and the SEC may or may not have discussed, but clearer regulation feels, at this point, like something that might have been a more effective path for the government than a Wells notice.

We humans love to draw issues into neat portions. You are either pro-tech or anti-tech. You are either pro-free speech or a censorious fuckwit. You are either a capitalist or someone who wants to regulate every single activity. That sort of thing. But when we grapple with how nation-states define their laws, and doubly so when more than one nation is involved, it’s rarely quite that clean,cut. Let’s see how the TikTok CEO performs before Congress today and what we learn next from the Coinbase situation.

Here’s to businesses operating in good faith being treated as such and for companies that aren’t to deal with the consequences of their actions.Read more about the TikTok hearing on TechCrunch

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