SEC threatens to sue Coinbase over new crypto product

The US Securities and Exchange Commission has warned that it will sue Coinbase if it launches a new product Lend that allows users to earn interest by lending their crypto holdings. Coinbase’s CEO Brian Armstrong labeled the agency’s aggressive actions “really sketchy behavior.”

According to Bloomberg, the U.S.’s biggest cryptocurrency exchange said it received a Wells notice saying the agency will bring an enforcement action if the company goes ahead with its Lend product. The SEC sends out Wells notices after it’s completed an investigation and found regulatory infractions. Companies that have been served have 30 days to respond.

Coinbase was “surprised” by the SEC’s letter, the company’s chief legal officer Paul Grewal said in a blog post late Tuesday.

“Coinbase has been proactively engaging with the SEC about Lend for nearly six months,” Grewal wrote in the post, adding that “the SEC still won’t explain why they see a problem.”

Grewal also argued that Lend did not constitute a security because it was “not an investment contract or a note.”

He added that the company would not be launching the product – which would initially offer a 4% annual yield for holders of its stablecoin, the USD Coin – until “at least October.”

Coinbase has long cast itself as a cautious, regulation-friendly exchange in the freewheeling world of cryptocurrencies—but joins an increasing number of crypto companies in complaining that the SEC is reticent on giving clear guidance on how its rules should be applied in the nascent space.

In the meantime, Brian Armstrong, Coinbase co-founder and CEO, blasted the regulatory scrutiny as “some really sketchy behavior coming out of the SEC.”

The SEC has subpoenaed the company for documents and received testimony from employees, Armstrong added in a series of tweets.

He alleged that the SEC is “engaging in intimidation tactics behind closed doors” and called for clearer regulatory guidance and for the SEC to enforce regulations equally across the industry.

“In May of this year, I traveled to DC to meet with every regulator and branch of government I could,” Armstrong said. “The SEC was the only regulator that refused to meet with me, saying ‘we’re not meeting with any crypto companies.’ This was right after we became the first crypto company to go public in the U.S.”

Armstrong said on Twitter that Coinbase reached out to the SEC for a briefing ahead of the launch of its Lend product, and the regulator responded by saying the 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,” Armstrong added.

“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 stated.

A number of platforms have started offering to pay interest to cryptocurrency holders if they lend or “stake” their balances, but the mechanisms for returning interest are often complex, and there is little regulatory oversight and no protection for investors if they face losses.

Authorities in Washington have been rushing to formulate rules for cryptocurrencies generally. SEC Chair Gary Gensler has warned that many cryptocurrency trading platforms host trading in unregistered securities that should be complying with the agency’s rules. He has also called for the SEC to have the explicit authority to monitor crypto exchanges, citing the need for investor protection.

Earlier this summer, state agencies in Texas, New Jersey, and Alabama initiated a crackdown on BlockFi, which offers interest-bearing crypto accounts, alleging that it amounted to an unregistered offering of securities. BlockFi denies the claims.

According to Bloomberg, in threatening to sue Coinbase Global Inc. if the exchange lets customers earn interest on their digital tokens, the SEC sent a warning to other firms already offering similar products or contemplating doing so. The move is the clearest sign yet that, under Gensler, the regulator will aggressively use its powers to thwart products it’s uncomfortable with — even before they launch.

Seems the SEC chair Gary Gensler is sending the crypto industry a message of how far the regulator would go to tame a market.