Coinbase has announced plans to offer a new yield product called Lend, which will let users earn interest on their cryptocurrency holdings by lending the assets to others for a fee. The US Securities and Exchange Commission (SEC) has warned the company that if it goes through with the plans to offer the new feature to users, the SEC will sue Coinbase.
The company announced the product offering in June, followed by opening up a waiting list for people who wanted to participate in the program. The original blog post said,
Today we're pleased to announce that after working closely with the SEC staff, we received approval to offer a security-based product called Coinbase Bundle. The bundle consists of any five cryptocurrencies available on Coinbase and weighted by market capitalization (and rebalanced at least once per day). Eligible customers can trade Coinbase Bundle using either their USD Wallet or Coinbase Pro account.
On the same day, SEC released a statement warning investors that Coinbase is planning to offer something called Lend which would be considered as security by the regulator and could lead to lawsuits against the company if it goes through with its plans. The company has received the warning earlier this year, but Coinbase has not yet received specific information on how Lend falls under securities regulations. The SEC statement says,
If a platform offers trading of digital assets that are securities and operates as an 'exchange,' as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.
Paul Grewal, Coinbase chief legal officer said in an interview with WSJ that the SEC had told Coinbase earlier this year that it considered Lend product a security "but wouldn't say why or how they'd reached that conclusion." He added,
We are considering the implications of the SEC's guidance and will continue to work with them if appropriate. At this point, we have not concluded that Coinbase Bundle is a security.
In a more recent blog post by Grewal, posted this week, he responded to the SEC's threat, saying,
Coinbase's Lend program doesn't qualify as a security - or to use more specific legal terms, it's not an investment contract or a note. Customers won't be "investing" in the program, but rather lending the USDC they hold on Coinbase's platform in connection with their existing relationship. And although Lend customers will earn interest from their participation in the program, we have an obligation to pay this interest regardless of Coinbase's broader business activities. What's more, participating customers' principal is secure and we're obligated to repay their USDC on request.
We shared this view and the details of Lend with the SEC. After our initial meeting, we answered all of the SEC's questions in writing and then again in person. But we didn't get much of a response. 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. But once again, we got no explanation from the SEC. Instead, they opened a formal investigation. 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. They also asked for the name and contact information of every single person on our Lend waitlist. We have not agreed to provide that because we take a very cautious approach to requests for customers' personal information. 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.
It's really unnerving that the SEC felt it was a good idea to request the details of everyone who expressed interest in the feature. There's no telling what they had planned to do with that information, but it was unlikely good. As a user of Coinbase (though not one who showed interest in Lend), I appreciate that the company has rejected the request. However, it is likely part of the reason why the SEC is skipping the regulatory process and jumping right into the litigation pool.
The SEC is playing a double-edged game with the cryptocurrency industry. They constantly say that they want to have discussions about everyone's role in this new space, but if Coinbase is to be believed, their words and actions do not match. Hopefully this is not an actual signal of what is to come for the cryptocurrency industry, and simply an over-anxious regulator not knowing what is going on.