Coinbase warns SEC about a lawsuit regarding Lend feature

The company claims that the regulator will not explain its problems with the feature.

Coinbase, a cryptocurrency exchange, seems to be having problems with the Securities and Exchange Commission. The issue is over a planned feature that allows people to lend cryptocurrency via its platform. In a Medium post on Tuesday, Coinbase’s chief legal officer wrote that the regulatory agency threatened to sue the company if it launched the feature. Coinbase’s CEO posted a Twitter thread on Tuesday evening saying that the SEC wasn’t clear about what it wanted.

Brian Armstrong, Coinbase’s CEO, said they told the SEC of its new Lend feature as an act of courtesy but didn’t expect any pushback. This was based on Armstrong’s impression that similar features exist elsewhere. However, according to Armstrong, the SEC informed the company that the lending feature would be considered a security, which would be regulated as an investment. Coinbase disagrees with that classification, but they could not argue their case in the same informal channels. Instead, according to Armstrong and the company, the SEC opened an investigation into Coinbase, asking for employee testimony and the names and contact information of people who had signed up for the Lend waitlist.

Armstrong states that Coinbase needs more information from SEC. He also requests a written explanation on how it deems Lend security. According to the Medium post, the SEC told Coinbase that it had assessed Lend against two benchmark securities cases tried in the Supreme Court: according to Investopedia.

Coinbase’s website and a Medium post it has published, Coinbase’s Lend feature is designed to allow users to lend cryptocurrency out and earn interest. Coinbase states that the loans will go to “verified borrowers” and that the company will guarantee the initial amount (so, for example, if a person lends $100 through the program, Coinbase ensures that $100 would be returned). The company also claims that you can expect a return of up to 4 per cent APY. In light of its SEC troubles, the company says that it won’t launch Lend “until at least October.”

A spokesperson for SEC stated to Reuters that the agency does not comment on possible investigations. However, many people have misinterpreted a recent tweet by the SEC’s Investor Education Twitter Account as trolling Coinbase. The tweet contains a video explaining bond concepts, which financial instruments allow you to loan money to a company, government, or other entity in return for interest payments. This tweet was posted Wednesday morning after Armstrong’s Tuesday-night thread. The account often posts similar videos or tips, so it is possible that the timing of the tweet was coincidental.

SEC’s disagreement with Coinbase may indicate its desire to regulate crypto more. The current chairman has said that Stablecoins, or cryptocurrencies whose value is pegged to something else like the US dollar, may fall under the SEC’s jurisdiction. Coinbase’s troubles could be related to this — the Lend feature, which started all of this, was to launch using USDC (a Stablecoin).


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