Coinbase's 'Lend' Program Faces Scrutiny From The SEC

September 9, 2021 04:15 PM
Crypto Story of the Day

Crypto Story of the Day




Crypto was up this morning. Solana (SOL) volumes on Bitfinex have outpaced those of ETH as the coin, up 23%, continues to outperform.

Crypto Story of the Day

In a series of tweets Tuesday, Coinbase CEO Brian Armstrong revealed that the SEC has threatened to sue the venue if it launches its interest-bearing “Lend” product. Coinbase’s Chief Legal Officer also published a post revealing that the SEC is investigating Lend. 

Lend, revealed in June but yet to launch, would allow users to earn 4% APY on USDC deposited with Coinbase. The 4% APY was described as “more than 50x the national average of a traditional savings account” while all deposited USDC “is guaranteed by Coinbase,” giving users “peace of mind” while they earn interest. 

A footnote regarding the “piece of mind” reference indicates that users “agree to all terms and accept any residual risks.” Coinbase’s terms for Lend include an “Acknowledgement of Risk” section that explains “you could lose all your Loaned Digital Currency if we are unable to repay your loan.” 

According to Armstrong, Coinbase was “planning to go live in a few weeks” with Lend, so the firm “reached out to the SEC to give them a friendly heads up and briefing.” The SEC responded that the “lend feature is a security” and failed to elaborate why and the regulator then issued requests for records and testimony. 

Armstrong describes the SEC’s behavior as “sketchy” and claims it’s “engaging in intimidation tactics behind closed doors.” Coinbase’s CEO also calls on the SEC to “publish your position, in writing, and enforce it evenly across the industry.” Armstrong concludes that if the 2 sides “end up in court we may finally get the regulatory clarity the SEC refuses to provide.” 

Coinbase CLO, Paul Grewal, largely reiterated Armstrong’s points and added that Coinbase won't be launching Lend “until at least October.” 5 state regulators are known to be challenging BlockFi’s crypto interest-bearing products. 

Last week the WSJ reported that the SEC had sent letters to several startups seeking information about platforms that allow users to earn interest on loaned cryptocurrencies. Over the past several weeks, SEC Chairman Gary Gensler has made several public appearances, in which he’s expressed his ambition and perspectives on regulating crypto. These have included a speech where Gensler described crypto as “rife with fraud, scams, and abuse” and that “[t]here’s a great deal of hype and spin about how crypto assets work.” Gensler concluded the speech by stating that the “legislative priority should center on crypto trading, lending, and DeFi platforms.”

Publicly criticizing the SEC is likely a strategy only Coinbase, entrenched as they are, could employ. Armstrong has previously criticized plans by the Treasury Department to collect large swathes of crypto transaction data. Those proposed rules were ultimately never implemented, in part due to the crypto community’s vocal opposition, which was initiated by Armstrong. 

Having said that, implying that only a simple notice— and not approval— from the SEC ought to be required for a new product is a considerable ask on Armstrong’s part. Referencing unlicensed crypto activities as precedent with a regulator taking up a renewed mandate to create a framework around the sector seems like an obvious stretch. 

Apart from Lend, countless crypto business models and assets are subject to legal uncertainty. On Gensler’s part, the Chairman’s tenure is getting off to a contentious start while he’s made it all but certain that further regulatory actions in the crypto space are to be expected in the coming period.

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