Coinbase Global’s CEO blasted the SEC for “really sketchy behavior” after the company received a warning that regulators plan to sue.
In a Twitter thread, Brian Armstrong said the SEC would be creating an unfair market if it tries to shut down its new lending product, which would allow consumers to earn interest on their crypto holdings.
“We’re being threatened with legal action before a single bit of actual guidance has been given to the industry,” Armstrong wrote on Twitter. “Regulation by litigation should be the last resort for the SEC, not the first.”
The issue centers on Coinbase’s product called Lend, which the company has marketed as a high-yield alternative to traditional savings accounts that could earn an annual yield of 4%. The product hasn’t been launched yet, but Coinbase encouraged customers in June to sign up for pre-enrollment.
Coinbase, the U.S.’s biggest cryptocurrency exchange, disclosed in a blog post that the SEC issued a Wells notice, meaning it may pursue enforcement action, and opened a formal investigation. In a blog post, Coinbase expressed surprise at the SEC’s move, adding that it plans to delay the launch at least until October.
“The SEC has told us it wants to sue us over Lend. We have no idea why,” the post written by Chief Legal Officer Paul Grewal is titled. It goes on to say the SEC has told Coinbase it considers Lend “to involve a security, but wouldn’t say why or how they’d reached that conclusion.”
The question of whether decentralized finance, or DeFi, lending pools qualify as securities is shaping up as a key legal battleground for the SEC. Part of it turns on whether such set-ups meet the definition of “investment contracts” as established in the Supreme Court’s Howey decision, which defined such contracts as “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
In recent months, various state agencies have issued warnings about similar yield-earning accounts from BlockFi Lending.
The SEC didn’t respond to interview requests.
Privately, ex-SEC officials said they were shocked by the agency’s posture. The former officials said the SEC typically waits for firms to start selling investments before announcing possible sanctions, indicating the agency has found a forceful way to shut down cutting-edge crypto offerings.
“The SEC is being aggressive for the first time in a long time,” said James Cox, a professor at Duke University School of Law. “The SEC has been putting a lot of muscle into cryptocurrency. It’s a big, fast-growing market and a fertile area for abuses.”
Coinbase said it’s been “proactively engaging” the SEC on Lend for six months and expressed surprise over the possible enforcement action.
“They responded by telling us this lend feature is a security. OK — seems strange, how can lending be a security?” Armstrong wrote on Twitter.
The agency is assessing Lend through Supreme Court cases Howey from 1946 and Reves from 1990, Grewal said, adding that formal guidance about how the SEC plans to apply those tests to such products would be helpful.
“They’ve offered us the chance to submit a written defense of Lend, but that would be futile when we don’t know the reasons behind the SEC’s concerns,” Grewal said.
The SEC has also asked for the name and contact information of every person on the Lend waitlist, Coinbase’s Grewal said.
“We have not agreed to provide that because we take a very cautious approach to requests for customers’ personal information,” he said. “We also don’t believe it is relevant to any particular questions the SEC might have about Lend involving a security, especially when the SEC won’t share any of those questions with us.”
New SEC Chair Gary Gensler, who’s repeatedly rung alarm bells over crypto exchanges during his tenure, said in an Aug. 5 letter to Senator Elizabeth Warren that regulators need more resources to protect crypto investors. He also said lawmakers should give watchdogs clear powers to write rules for exchanges, including DeFi trading venues.