Crypto

SEC wants to regulate Coinbase’s crypto yield product, Coinbase disagrees

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Coinbase app logo on iPhone
Image Credits: Chesnot / Getty Images

Coinbase CEO Brian Armstrong has reacted strongly to the company’s current relationship with the U.S. Securities and Exchange Commission. According to him, the SEC is threatening to sue the cryptocurrency exchange if it launches its yield-generating product called Coinbase Lend.

With this new product, Coinbase wants to compete with popular decentralized finance (DeFi) products, such as Compound and Aave. The company wants to operate a lending pool focused on USD Coin (USDC), a stablecoin that is pegged to USD.

If the company manages to launch Coinbase Lend, users will be able to contribute to the lending pool by sending crypto assets to Coinbase Lend. Eventually, the company plans to lend out those crypto assets. Coinbase users get high interest rates in exchange to contributing to the lending pool. Coinbase promises 4% APY on its preview page.

According to Brian Armstrong, the company reached out to the SEC before releasing it. “They responded by telling us this lend feature is a security,” he said on Twitter.

“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,” he added.

Coinbase’s Chief Legal Officer Paul Grewal also wrote about the events on the company’s blog. It appears that the company decided to move forward and pre-announce the new feature despite the SEC saying that Coinbase’s Lend program is a security.

“The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion. Rather than get discouraged, we chose to continue taking things slowly. In June, we announced our Lend program publicly and opened a waitlist but did not set a public launch date,” Grewal wrote.

Here’s a pro tip for entrepreneurs reading this post: If the SEC tells you that you can’t launch something, don’t put up a waitlist with the words “coming soon.”

To no one’s surprise, Coinbase says that the SEC decided to open a formal investigation after that. One employee also had to spend a day with the SEC to answer questions.

“They asked for documents and written responses, and we willingly provided them. They also asked for us to provide a corporate witness to give sworn testimony about the program. As a result, one of our employees spent a full day in August providing complete and transparent testimony about Lend,” Grewal wrote.

As a result, Coinbase is now mad and has chosen to launch a PR campaign against the SEC. Brian Armstrong’s main argument is that other companies have been offering lending pools already, so there’s no reason why some companies can offer such a product and not Coinbase.

“Meanwhile, plenty of other crypto companies continue to offer a lend feature, but Coinbase is somehow not allowed to,” he tweeted.

This is a risky strategy as Coinbase could end up alienating the crypto ecosystem at large. There could be increased scrutiny on DeFi and industrywide enforcement of stricter rules, as Sar Haribhakti pointed out.

“Ostensibly the SEC’s goal is to protect investors and create fair markets. So who are they protecting here and where is the harm? People seem pretty happy to be earning yield on these various products, across lots of other crypto companies,” Brian Armstrong said.

If you read the fine print, Coinbase doesn’t protect investors with its Lend program. Here’s what it says at the bottom of the Coinbase Lend page: “Lend is not a high-yield USD savings account, and Coinbase is not a bank. Your loaned crypto is not protected by FDIC or SIPC insurance.”

That’s not very reassuring for investors. At some point, Coinbase and the SEC will have to sit at the same table to discuss crypto lending products because a tweetstorm won’t solve the issue.

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