The SEC has apparently threatened to sue Coinbase over its new Lend program that will allow clients to earn interest on their cryptos by lending them out. As part of the program, Coinbase will also be able to offer crypto loans, but the SEC has called this feature a security.
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Coinbase revealed this information in a blog post titled, The SEC has told us it wants to sue us over Lend. We don’t know why. The CEO and founder of Coinbase, Brian Armstrong, provided further detail in a long Twitter thread where he explained how the SEC has provided no guidance and has acted "sketchy."
Armstrong said that Coinbase reached out to the SEC to understand its motive as Cryptocurrency does not exactly fit into the security category given they do not represent any underlying ownership of debt or equity and no promise was given for the appreciation of the prices of the coins.
"They responded by telling us this lend feature is a security. Ok - seems strange, how can lending be a security? So we ask the SEC to help us understand and share their view. We always make an effort to work proactively with regulators, and keep an open mind," said Armstrong. "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."
John Hempton, a famous Australian investor and CIO of Bronte Capital Management, responded to Armstrong's tweet with a picture of the first page of the Securities Act of 1933.
This caused some confusion in the following comments as people began to debate the well-known investor about how there is nothing to do with "digital assets" specifically in the law. Hempton simply responded saying, "The question was a loan for interest. Seems pretty covered."
While cryptocurrency itself may not be a security, Coinbase's Lend program plans to issue loans for interest, which could fall under the security definition. Should Coinbase and the SEC take this to court and the business of these loans be considered the issuance of securities, several other companies like BlockFi, Celsius, Ledn and more may face similar issues.
The Coinbase stock price has dropped as much as 5% intraday on the news, but many are puzzled by the SEC's move as several other companies already offer the same product. Most notably, the rival exchange Gemini has been offering a lending program since February. Another lending and borrowing company, BlockFi, has been operating in almost every U.S. state since December of 2020. It's unclear if these businesses will be the next targets for the SEC.
Armstong also argued that the SEC has applied its power unevenly across companies that offer these types of products.
"Look….we're committed to following the law. Sometimes the law is unclear. So if the SEC wants to publish guidance, we are also happy to follow that (it's nice if you actually enforce it evenly across the industry equally btw)," said Armstrong.
This story is developing.