SEC Threatens to Sue Coinbase Over Crypto Yield Scheme It Deems Security

The United States Securities and Exchange Commission (SEC) has reportedly threatened to sue Coinbase over a crypto yield program it views...

The United States Securities and Exchange Commission (SEC) has reportedly threatened to sue Coinbase over a crypto yield program it views as security.

Coinbase CEO Brian Armstrong tweeted on Sept. 8 that this was “really sketchy behavior on the part of the SEC recently” before launching into a 21-post discussion thread detailing the relationship of the SEC with the company.

Armstrong explained that the cryptocurrency exchange approached the SEC earlier this year to notify the enforcement agency of the upcoming Coinbase Lend program which intends to offer a 4% annual return on deposits. of USDC stablecoin.

According to the CEO of Coinbase, the SEC responded by telling the company that the loan program is a title with no explanation, and threatened to sue if the service goes live:

“They refuse to tell us why they think it’s security, and instead assign us a bunch of files (we comply), demand testimony from our employees (we comply), then tell us that they will sue us if we launch, with no explanation as to why.

Armstrong pointed out that there are other crypto firms in the market that currently provide similar lending services to their clients, and asked the SEC to clarify the regulations on the matter. The SEC actions, if Armstrong accurately reported them, appears to be bad news for competitors BlockFi and Celsius who already offer crypto yield products. BlockFi is under investigation in a number of states over its high-interest products.

In a blog post published today, Paul Grewal, chief legal officer of Coinbase, expressed his dismay at the actions of the SEC as he questioned the claim that the lending function can be seen as an “investment contract or a note”.

“Customers will not invest in the program, but rather lend the USDC they hold on the Coinbase platform as part of their existing relationship. And while Lend’s customers will earn interest on their participation in the program, we have an obligation to pay that interest regardless of Coinbase’s broader business activities, ”he said.

Grewal went on to explain that the only clarification provided to the company is that the loan program is currently being evaluated as part of the Howey test:

“They only told us that they were evaluating our loan product through the lens of decades-old Supreme Court cases called Howey and Reves. The SEC will not share the assessment itself, only the fact that it did.

SEC boss Gary Gensler has regularly urged crypto firms to work with the SEC so that they can operate in public settings and ensure their survival. Grewal said the SEC’s actions appeared to contradict Gensler’s statements:

“The SEC has repeatedly asked our industry to ‘talk to us, come in’. We did it here. But today all we know is that we can either keep Lend out of the market indefinitely without knowing why, or we can be sued. “

“A healthy regulatory relationship should never leave the industry in this kind of stalemate without an explanation. Dialogue is at the heart of good regulation, ”he said.

Related: SEC reportedly investigates decentralized exchange Uniswap

Grewal said the company will delay launching the loan program until at least October pending further comments from the SEC.