Coinbase, a cryptocurrency exchange, appears to be having issues with the Securities and Exchange Commission. The issue is over a feature that allows users to lend cryptocurrency through Coinbase's platform. The chief legal officer of Coinbase wrote in Medium on Tuesday that the regulator threatened to sue the company for launching the feature. On Tuesday evening, Coinbases CEO wrote a tweet stating that the SEC was not clear on what it wanted.
Brian Armstrong, Coinbases CEO, stated that the company spoke to the SEC about the new Lend feature, but did not anticipate any resistance. He said this based on the impression that similar features are available on other platforms. Armstrong claims that the SEC informed them that the lending feature would be treated as a security and would therefore be subject to regulation as an investment. Coinbase disagrees with this classification but was unable to present their case through the same informal channels. Armstrong and the company claim that the SEC instead opened an investigation into Coinbase and asked for testimony from employees. They also wanted to know the names and contact details of those who signed up for Lend.
5/ They replied by saying that the lend feature was a security. Okay, that seems odd. How can lending be considered a security? We ask the SEC for their help and to share their views. We are open-minded and work with regulators in a proactive manner. Brian Armstrong (@brian_armstrong), September 8, 2021 7/ We are committed to complying with the law. Sometimes, the law is not clear. We are happy to follow the guidance published by the SEC. It would be nice to see it applied equally across the entire industry. Brian Armstrong (@brian_armstrong) September 8, 2021
Armstrong stated that Coinbase wants more information from the SEC, and a written explanation as to why it considers Lend a security. The Medium post states that the SEC informed Coinbase that Lend was assessed against two benchmark securities cases in the Supreme Court: SEC v. W. J. Howey Co., and Reves v. Ernst & Young. According to Investopedia, the former established the standard for securities if there is a reasonable expectation that profits will be derived from other efforts.
According to Coinbase's website, and a Medium post it has posted, the Lend feature will allow people to lend their cryptocurrency and earn interest. Coinbase claims that loans will be made to verified borrowers, and that they will guarantee the initial value. For example, if you lend $100 through the program Coinbase will give you $100 back. You can also expect a return up to 4 percent APY, according to Coinbase. According to the company, Lend will not be launched until October due to SEC problems.
A spokesperson for SEC stated to Reuters that they do not comment on whether an investigation is ongoing. However, the tweet contains a video explaining bonds, which are financial instruments that allow you give a loan to a government or company in exchange for interest payments. After Armstrong's Tuesday night thread, the tweet was published Wednesday morning. It is possible that the timing was accidental as the account posts similar videos and tips regularly.
SECs dispute with Coinbase could be indicative of the SECs move to regulate crypto more severely. According to the current chairman, Stablecoins (or cryptocurrencies whose value is tied to the US dollar) may be under the SECs control. This could be relevant to Coinbase's woes. The Lend feature, which started all of this, was launched using USDC (a Stablecoin).
