Skip to content
Home » News » Coinbase Lend Faces Backlash With The SEC

Coinbase Lend Faces Backlash With The SEC

The bitcoin exchange isn’t receiving the regulatory approval it expected for its Lend product, citing a lack of clarity from the SEC.

Bitcoin exchange Coinbase’s new Lend program is facing strong opposition from the U.S. Securities and Exchange Commission (SEC), which called the product a securities offering. Coinbase Chief Legal Officer Paul Grewal published a blog post today saying that the SEC will sue the company if it launches Lend, claiming the regulatory agency lacks clarity. The situation was also explained by Coinbase CEO Brian Armstrong in a lengthy Twitter thread, highlighting the company’s policies and the back-and-forth communication with the SEC.

“We were planning to go live in a few weeks, so we reached out to the SEC to give them a friendly heads up and briefing,” said Armstrong, referring to his company’s new Lend product. “They responded by telling us this lend feature is a security…and then tell us whey will be suing us if we proceed to launch, with zero explanation as to why.”

However, some disagree with Coinbase’s remarks that the SEC hasn’t clarified why lending is a security. Additionally, the U.S. Supreme Court ruled in 1982 that the meaning of a security is context-dependent. Paired with the fact that the U.S. legal system relies on case law, by inferring that cryptocurrency lending is a security and providing the case, the SEC could be, in theory, also providing the reason.

The biggest U.S. exchange is facing frustrated plans, as it sought to follow other players in the industry which already offer bitcoin and cryptocurrency lending products. Coinbase Lend, which was set for launch in a matter of weeks, seeks to provide the exchange’s users with an option to earn yield in their bitcoin and cryptocurrency holdings.

Centralized lending services work by having the user deposit their funds in a particular account with the promise of receiving periodic, passive earnings. In contrast, the centralized broker uses those funds to lend, trade, or engage in other high-risk activities. Interestingly, such a process actually aligns with the definition of securities lending.

But Coinbase’s product is not new; U.S. companies such as BlockFi, Celsius, and Gemini have been offering similar cryptocurrency lending options for some time now  which is also something Armstrong complains about, citing lack of treatment standards. However, the SEC and state-level agencies have recently started taking a more active stance against such products. Centralized lending provider BlockFi, for instance, has been hit with cease and desist notices from multiple state regulators for its BlockFi Interest Account (BIA) product.

“Since March 4, 2019, BlockFi…has been, at least in part, funding its lending operations and proprietary trading through the sale of unregistered securities in the form of cryptocurrency interest-earning accounts,” ruled the State of New Jersey Bureau of Securities in a cease and desist order. Additionally to New Jersey, BlockFi’s BIA product is currently being cracked down in Texas, Alabama, Vermont, and Kentucky.

It shouldn’t take long before federal regulators start paying more attention to BIA and other similar products, and the SEC’s recent remarks to Coinbase regarding the exchange’s Lend product may kickoff more coordinated federal efforts. In fact, the SEC has already filed an action against a cryptocurrency lending platform in the past. The case charged the fraudulent company and its founders in a $2 billion scheme.

Gary Gensler, the SEC chair, spoke to the European Parliament on September 1st that the transformation Bitcoin can ensue in the world could be as big as that of the internet in the 1990s. Gensler, who taught blockchain courses at MIT, also said how unregulated cryptocurrency exchanges and stablecoins pose a risk to public policy goals and the American population, prompting the SEC to issue an alert to “crypto” investors.

In August, Gensler addressed the same topic at the Aspen Security Forum, drawing a dividing line between Bitcoin and the so-called cryptocurrency altcoins, which are, in his words, “rife with fraud, scams, and abuse in certain applications.” Gensler later added that, in his view, “the legislative priority should center on crypto trading, lending, and DeFi platforms.”

Therefore, one can infer that much of the SEC’s concerns and future action plans lie in the scammy altcoin world, where quick profits are promised and promoted through vigorous marketing and little due diligence. Hacks are common among those projects as well, and usually, the average users are the ones paying the price.

In Armstrong’s words, “the SEC’s goal is to protect investors and create fair markets,” so it makes sense for the SEC to seek greater regulatory scrutiny in altcoin and stablecoin markets. Bitcoin, contrastingly, is founded on the low-time preference ideals of saving and investing rather than the high-frequency trading and speculating mantras typical of altcoin projects.

Leave a Reply