SEC threatens to sue Coinbase over lending product


The US Securities and Exchange Commission has warned that it will sue Coinbase if it launches a new digital asset lending product and also issued subpoenas to the cryptocurrency trading platform to provide it with more information, according to executives.

Paul Grewal, Coinbase’s chief legal officer, said in a blog post that the company, which in April became the first major US cryptocurrency exchange to list publicly, had received a Wells notice from the regulator saying it would pursue legal action if Coinbase introduced a yield product called Lend.

Lend is designed to allow users to earn interest on certain digital assets on the platform.

Grewal said the SEC had told Coinbase earlier this year that it considered the Lend product a security “but wouldn’t say why or how they’d reached that conclusion.”

Coinbase announced the product in June and opened a waiting list to interested users, prompting the SEC to open a formal investigation into the exchange and issue it with subpoenas, he added.

“Despite Coinbase keeping Lend off the market and providing detailed information, the SEC still won’t explain why they see a problem,” Grewal said. “Rather, they have now told us that if we launch Lend they intend to sue.”

Brian Armstrong, Coinbase’s chief executive, took to Twitter to attack the SEC, arguing that its actions constituted “sketchy behavior.”

“They are refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead are engaging in intimidation tactics behind closed doors,” he wrote. “Whatever their theory is here, it feels like a reach/land grab vs other regulators.”

Coinbase has long cast itself as a cautious, regulation-friendly exchange in the freewheeling world of cryptocurrencies—but joins an increasing number of crypto companies in complaining that the SEC is reticent on giving clear guidance on how its rules should be applied in the nascent space.

A number of platforms have started offering to pay interest to cryptocurrency holders if they lend or “stake” their balances, but the mechanisms for returning interest are often complex, and there is little regulatory oversight and no protection for investors if they face losses.

Authorities in Washington have been rushing to formulate rules for cryptocurrencies generally. SEC Chair Gary Gensler has warned that many cryptocurrency trading platforms host trading in unregistered securities that should be complying with the agency’s rules. He has also called for the SEC to have the explicit authority to monitor crypto exchanges, citing the need for investor protection.

Earlier this summer, state agencies in Texas, New Jersey, and Alabama initiated a crackdown on BlockFi, which offers interest-bearing crypto accounts, alleging that it amounted to an unregistered offering of securities. BlockFi denies the claims.

Grewal, too, argued that Lend did not constitute a security because it was “not an investment contract or a note.”

He added that the company would not be launching the product—which would initially offer a 4 percent annual percentage yield for holders of its stablecoin, the USD Coin—until “at least October.”

There were falls in the prices of a wide range of cryptocurrencies on Wednesday, with bitcoin and ethereum both down more than 12 percent by 7 am London time. Coinbase said the market overall was down almost 14 percent over the past 24 hours.

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