- Following threats of a lawsuit by the U.S. Securities and Exchange Commission (SEC), Coinbase (NASDAQ:COIN) said it did not know why the agency wanted to sue it.
- Five US states have also sent lawsuit notices to Coinbase to stop its Lend program.
- The company’s shares fell hours after the agency’s warning was issued.
Cryptocurrency exchange Coinbase Global Inc (COIN.O) responded to the U.S. Securities and Exchange Commission (SEC) on Wednesday after receiving a lawsuit threat from the agency if it continues with plans to launch a cryptocurrency loan program where users can earn interest.
The immediate effect of the news on the SEC’s notice was a drop in the company’s shares by 2.5%. The firm had planned to launch its Coinbase Lend in the coming weeks, but after the warning, it could be delayed until October.
In a statement, Coinbase Chief Legal Officer Paul Grewal said, “the SEC gave us what’s called a Wells notice about our planned Coinbase Lend program.” He explained that this type of notice “is the official way a regulator tells a company that it intends to sue the company in court.”
The Lend project was launched by the San-Francisco-based trading platform last July. This program allows Coinbase users to lend their digital assets to other people in exchange for earning interest.
It is not an exclusive product of the DeFi platform, as there are already similar platforms in other countries and the US.
SEC’s Behavior Is “Incomplete”
Since then, the US regulator has expressed concern that this financial product does not comply with the laws that govern the securities market. Although the company has tried to help the SEC understand it is within the legal framework, the government agency has been adamant.
The SEC’s ultimatum to Coinbase is clear: If it doesn’t back down on its plans, then it will see itself on the stand. The agency’s threat to the largest DeFi platform in the world comes after similar movements by five U.S. states that sent individual notices to Coinbase days ago.
Coinbase CEO Brian Armstrong expressed his frustration with the agency’s scrutiny through his Twitter (NYSE:TWTR) account. Armstrong described the SEC’s behavior as “incomplete” and argued that the agency is wrong to describe its loans function as a security.
On The Flipside
- Perhaps what is really under discussion is the transformation of DeFi exchange platforms into financial intermediation companies, just like any other bank, but with cryptocurrencies.
- Coinbase CEO Brian Armstrong has been one of the harshest critics of the Infrastructure Bill introduced by the White House and passed in the Senate in August.
“We Don’t Know Why”
"The SEC has told us that it wants to sue us for the loan without telling us why, after months of effort by Coinbase to participate productively," Grewal wrote in the headline of the post published on the company’s blog.
"As surprised as we were by the SEC's threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it.
The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion,” remarked the chief legal officer.
Later, he indicated that the company “has been proactively engaging” with the SEC about Lend for nearly six months. According to him, they are eager to hear your perspective as they explore innovative ways for our clients to gain more financial empowerment at Coinbase.
He said that in the specific case of the Lend program, the company seeks to “allow eligible customers to earn interest on select assets on Coinbase, starting with 4% APY on USD Coin (USDC)”
According to him, other companies dedicated to the cryptocurrency trade have recently launched financial loan products.
“Coinbase believes in the value of open and substantive dialogue with our regulators. So we took Lend to the SEC first,” Grewal said.
Why You Should Care?
Regulation of exchange platforms in the US is just the beginning. In July, the New Jersey government ordered cryptocurrency platform BlockFi Inc not to offer any more interest-bearing accounts, which have raised just over $14.7 billion from investors.
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