They refuse to explain why they believe it is a security and instead request a bunch of our documents, Brian Armstrong said after revealing the SEC’s threat to sue Coinbase.
The Securities and Exchange Commission (SEC) of the United States has reportedly threatened to sue Coinbase over a crypto yield program that the SEC believes is security. On Sept. 8, Coinbase CEO Brian Armstrong tweeted that the SEC has been engaging in some “pretty dodgy conduct recently,” before launching into a 21-post thread documenting the SEC’s encounters with the firm.
Armstrong added that the crypto exchange approached the SEC early this year to update the regulator on the upcoming Coinbase Lend program, which will give a 4% annual income on USDC stablecoin deposits. According to the Coinbase CEO, the SEC responded by notifying the company without explanation that the lending program is security and threatening to sue if the service is launched:
“They refuse to tell us why they think it’s a security, and instead subpoena a bunch of records from us (we comply), demand testimony from our employees (we comply), and then tell us they will be suing us if we proceed to launch, with zero explanation as to why.”
Armstrong noted that there are now other cryptocurrency organizations offering similar loan services to their consumers and urged the SEC to provide regulatory clarification on the subject. If Armstrong’s reporting is accurate, the SEC’s moves appear to be terrible news for competitors BlockFi and Celsius, both of which also offer crypto income products. In a number of states, BlockFi is being investigated for its high-interest products.
In a blog post published today, Paul Grewal, Coinbase’s Chief Legal Officer, voiced his disappointment with the SEC’s actions, challenging the allegation that the lending feature is an “investment contract or a note.”
“Customers will not be ‘investing in the initiative, but rather lending the USDC they have on Coinbase’s platform as part of their current relationship. And, while Lend customers will earn interest as a result of their participation in the program, we are obligated to pay this interest regardless of Coinbase’s broader commercial operations,” he added.
Grewal continued by stating that the firm’s only explanation is that the lending program is now being evaluated using the Howey Test: “They have merely stated that they are evaluating our Lend product in light of two decades-old Supreme Court decisions known as Howey and Reves. The SEC will not share the assessment itself, simply that it was conducted.”
Gary Gensler, the SEC’s chairman, has repeatedly pushed crypto businesses to collaborate with the agency in order to operate within public frameworks and assure their existence. Grewal stated that the SEC’s actions appear to be in conflict with Gensler’s statements:
“The SEC has repeatedly asked our industry to ‘talk to us, come in.’ We did that here. But today all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued.”
“A strong regulatory relationship should never place the industry in such a precarious position without reason. Dialogue is critical to effective regulation,” he stated. Grewal added that the firm will delay the loan program’s introduction until at least October to await additional feedback from the SEC.
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