The SEC threatens to sue Coinbase over its crypto lending product - and CEO Brian Armstrong responds by calling the regulator's actions 'sketchy'

Brian Armstrong, founder of Coinbase and CEO. Steven Ferdman/Getty Images
According to Coinbase, the SEC will sue Coinbase if they release their crypto lending product.

Brian Armstrong, CEO of the SEC, complained about "sketchy behavior", in a Twitter rundown.

Armstrong stated that the regulator was the only one who refused to meet him earlier in the year.

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Coinbase announced Wednesday that the Securities and Exchange Commission will sue the crypto exchange for releasing its lending product. This was a move that led CEO Brian Armstrong complaining about the regulator's "sketchy" behavior.

The US's largest crypto exchange said that it had contacted SEC to inform them about the Lend product. This will allow people to earn interest on crypto holdings before it goes live.

According to Paul Grewal (the company's chief lawyer), Coinbase was proactive in engaging with regulators for six months to ensure that the Lend program conformed to the law.

The SEC informed Coinbase at that time that its lend feature was considered to be a security. However, it didn't explain how that decision came about.

The company was therefore surprised to receive a Wells Notice last week, which is a letter that the SEC sends to entities when they plan to take enforcement actions.

"The SEC has said it wants to sue me over Lend. Grewal posted Wednesday in a blog that Grewal didn't understand why.

Armstrong, Coinbase's boss, took to Twitter to voice his disapproval at the regulatory agency.

He tweeted, "Some really sketchy behaviour coming out of SEC recently,"

Armstrong said, "They refuse to explain why they believe it's security, and instead subpoena records from us (we obey), demand testimony of our employees (we obey), and then tells us that they will sue us if they proceed to launch, with no explanation as to why."

He said that Coinbase is not permitted to lend, while many other crypto companies offer it.

The company announced in June that it would launch its lending program and create a waiting list. It will offer 4% interest on USD coin holdings at launch. These funds will be lent and Coinbase could no longer be their custodian. Grewal stated that Lend will not be launched publicly until October.

He stated that the Lend program does not qualify as security because it doesn't include an investment contract nor a note.

He stated that customers will not be "investing" in the program but instead lending USDC they have on Coinbase to their existing relationship.

Grewal stated that the SEC is evaluating Lend's Supreme Court decisions in Howey, Reeves, and other cases, from 1946 and 1990, respectively. However, it has not provided any formal guidance.

He also requested contact information and names of all people on Lend's waiting list. However, the company refused to comply because the data was sensitive.

Insider asked for comment but the SEC did not immediately respond.

This is the latest action by the SEC against crypto companies. The SEC filed a lawsuit against Ripple in late 2013 over the marketing of its XRP token. It is currently investigating the operator Uniswap, the largest DeFi exchange.

Armstrong met Fed Chair Jerome Powell, and other heads of agency heads in May "to answer questions about crypto," but stated that the SEC was the only regulator who refused to meet him, despite Coinbase becoming the first cryptocurrency company to go public.

"Gensler was confirmed a month ago, so I dismissed it as the SEC still trying to get its feet under it. Armstrong stated, "Now I'm not so certain."

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