The U.S. Securities and Exchange Commission is strongly opposing Coinbase’s Lend program. They called it a securities offering. Paul Grewal, Coinbase’s Chief Legal Officer, posted a blog today stating that the SEC would sue the company if Lend is launched. He claimed that the regulatory agency lacks clarity. Brian Armstrong, Coinbase CEO, also addressed the situation in a lengthy Twitter thread. He highlighted the company’s policies as well as the back-and forth communication with the SEC.
Lend Product
Armstrong said that his company’s new Lend product was a priority for him. “They told us that the lend feature was a security…and then they told us that they would sue us if we launch, with no explanation.”
Some disagree with Coinbase’s assertion that the SEC has not clarified why lending is considered a security. In 1982, the U.S. Supreme Court ruled that security meaning is context-dependent. The fact that the U.S. legal systems rely on case law means that by inferring that cryptocurrency lending constitutes security and providing the case, it could also be proving the reason.
The largest U.S. exchange is facing a setback as it tries to follow other players in this industry that offer cryptocurrency lending products and bitcoin. Coinbase Lend was scheduled to launch in just a few weeks. It offers users the opportunity to earn a return on their cryptocurrency and bitcoin holdings.
Centralized Lending Services
These are where the user deposits their funds into a specific account and promises to receive periodic, passive income. The centralized broker, on the other hand, uses these funds to trade, lend, or engage in high-risk activities. This process is actually in line with the definition of securities lending.
Coinbase’s product, however, is not new. U.S. companies like BlockFi, Celsius and Gemini have offered similar cryptocurrency lending options for some years now. Armstrong also complains about the lack of treatment standards. However, the SEC as well as state-level agencies have taken a stronger stance against these products. For its BlockFi Interest Account, a central lending provider, BlockFi has received cease and desist notices by multiple state regulators.
“Since March 4, 2019, BlockFi…has, at least in part…financed its lending operations and proprietary trades through the sale of unregistered securities under the name of cryptocurrency interest-earning account,” the State of New Jersey Bureau of Securities issued a cease and desist notice. BlockFi’s BIA product, in addition to New Jersey, is being investigated in Texas, Alabama and Vermont.
BIA Products
Federal regulators should pay more attention to BIA products and similar products. Coinbase’s recent comments by the SEC regarding the Lend product of the exchange may encourage federal agencies to coordinate their efforts. The SEC has filed actions against cryptocurrency lending platforms in the past. The case brought charges against the fraudulent company and its founders in connection to a $2 billion scheme.
The SEC chair Gary Gensler spoke to the European Parliament on September 1, stating that the potential transformation that Bitcoin could bring about in the world could be just as large as the internet’s in the 1990s. Gensler, who was a professor at MIT of blockchain, also spoke out about how unregulated cryptocurrency exchanges, and stablecoins, pose a risk for public policy goals, and the American population. This prompted the SEC to issue an alert for “crypto” investors.
Gensler addressed the topic in August at the Aspen Security Forum. He drew a line between Bitcoin and so-called cryptocurrency altcoins. These are, according to Gensler, “rife in fraud, scams and abuse in some applications.” Gensler added that he believed the priority of legislation should be crypto trading, lending, DeFi platforms, and other related areas.
Conclusion
It is clear that the SEC has concerns about the scammy altcoin market, where quick profits can be promised and promoted with a lot of marketing and little due diligence. Hacks are also common in these projects, and often, the average user is the one paying the price.
Armstrong stated that “the SEC’s goal” is to protect investors and create fair market conditions. Therefore, it makes sense for them to increase regulatory scrutiny of stablecoin and altcoin markets. Bitcoin, on the other hand, is based on low-time preferences for saving and investing, rather than high-frequency trading or speculating mantras that are typical of altcoins.