According to executives, the US Securities and Exchange Commission warned Coinbase that it would sue it if it launches a digital asset lending product. It also issued subpoenas for more information to the cryptocurrency trading platform.
Paul Grewal, Coinbases chief lawyer, stated in a blog post, that the regulator had sent a Wells Notice to the company stating it would take legal action if Coinbase introduced Lend, a yield product.
Lend allows users to make an investment in certain digital assets.
Grewal stated that the SEC had earlier in the year told Coinbase that it considered Lend a security, but would not say why or how.
Coinbase launched the product in June. They also opened a waitinglist for interested users. This prompted the SEC, he said, to open a formal investigation and issue subpoenas to the exchange.
Grewal stated that despite Coinbase removing Lend from the market and providing detailed information about the problem, the SEC will not explain why they think there is a problem. Instead, they told us they will sue us if we launch Lend.
Chief executive of Coinbases, Brian Armstrong, attacked the SEC on Twitter, claiming that its actions were sketchy.
He wrote that they are refusing to give any opinions in writing to industry about what should be allowed and why. Instead, they are using intimidation tactics behind closed doors. It doesn't matter what their theory may be, it feels like they are trying to grab other regulators.
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Coinbase has been portrayed as a prudent, regulation-friendly exchange in a freewheeling space of cryptocurrencies. However, Coinbase joins a growing number of crypto companies complaining about the SEC's reticence to provide clear guidance on how it should apply its rules in this emerging space.
Many platforms offer interest payments to holders of cryptocurrency if they lend or stake their funds. However, the mechanisms for returning interest can be complex and there is no regulatory oversight. Investors also have little protection if they lose.
Washington authorities have been quick to establish rules for cryptocurrency generally. Gary Gensler, chair of the SEC, has warned that cryptocurrency trading platforms allow trading in unregistered securities and should adhere to agency rules. He also demanded that the SEC be given the authority to inspect crypto exchanges. This is to protect investors.
BlockFi, which provides interest-bearing crypto accounts to customers, was targeted by state agencies from Texas, New Jersey and Alabama earlier this summer. They claimed that the account was an unregistered offering or securities. BlockFi refutes the claims.
Grewal also argued that Lend was not a security since it wasn't an investment contract nor a note.
He said that the company would not launch the product. The initial yield would be 4 percent per year for USD Coin holders, but this would be extended to October.
On Wednesday, prices for a variety of cryptocurrency fell. Bitcoin and ethereum were both down over 12 percent as of 7:05 AM London time. Coinbase reported that the market was down nearly 14 percent in the last 24 hours.
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