The SEC wishes to regulate Coinbase‘s cryptocurrency yield programme; Coinbase objects

Coinbase CEO Brian Armstrong has expressed strong feelings about the company's existing relationship with the Securities and Exchange Commission in the United States. According to him, the SEC has threatened to sue Coinbase for launching its yield-generating product, Coinbase Lend.

Coinbase intends to compete with popular decentralised finance (DeFi) applications such as Compound and Aave with this new offering. The organisation intends to establish a lending pool specialising in USD Coin (USDC), a stablecoin pegged to the US dollar.

If Coinbase Lend is successful, customers will be able to participate to the loan pool by donating crypto assets to Coinbase Lend. The company intends to eventually lend out such crypto assets. Coinbase members get a high rate of interest for contributing to the lending pool. On its preview page, Coinbase advertises a 4% annual percentage yield.

According to Brian Armstrong, the corporation contacted the SEC prior to disclosing the information. “They reacted by informing us that the lend option is a security measure,” he wrote on Twitter.

“They refuse to explain why they believe it is a security, instead subpoenaing our documents (which we cooperate with), demanding testimony from our employees (which we comply with), and then threatening to sue us if we ahead with the launch, with no explanation,” he added.

Coinbase's Chief Legal Officer, Paul Grewal, also blogged about the incidents. The company appears to have chosen to proceed and pre-announce the new feature despite the SEC's determination that Coinbase's Lend programme is a security.

“The SEC informed us that it considers Lend to be a security, but did not explain why or how it arrived at that judgement. Rather than succumb to discouragement, we resolved to proceed cautiously. We publicly launched our Lend initiative in June and opened a waitlist, but did not specify a timetable for its public launch,” Grewal wrote.

For entrepreneurs who are reading this, here's a pro tip: If the Securities and Exchange Commission advises you that you cannot launch something, do not create a waitlist with the phrase "coming soon."

To no one's surprise, Coinbase reports that the SEC then initiated a formal investigation. Additionally, one employee was required to spend a day answering questions from the SEC.

“They requested documentation and written responses, which we readily delivered. Additionally, they requested that we produce a corporate witness to deliver sworn testimony on the programme. As a result, in August, one of our workers spent an entire day presenting detailed and candid testimony regarding Lend,” Grewal stated.

As a result, Coinbase has gone insane and launched a public relations campaign against the SEC. Brian Armstrong's primary point is that other companies have already offered lending pools, and there is no reason why Coinbase cannot.

“In the meantime, a number of other cryptocurrency companies continue to offer a lend feature, but Coinbase is apparently prohibited from doing so,” he tweeted.

This is a hazardous tactic, since Coinbase risks alienating the whole crypto industry. As Sar Haribhakti noted, there may be more monitoring of DeFi and industry-wide implementation of tougher norms.

“The SEC's stated objective is to safeguard investors and promote fair markets. So who are they defending here, and what is the danger? People appear to be quite content with the yield on these various goods, which span numerous other cryptocurrency companies,” Brian Armstrong said.

If you read the small print, Coinbase's Lend programme does not safeguard investors. At the bottom of the Coinbase Lend page, it states: “Lend is neither a high-yield savings account in US dollars, nor is Coinbase a bank. Your lent crypto is not insured by the FDIC or SIPC.”

That does little to reassure investors. Coinbase and the SEC will eventually have to sit down to discuss crypto loan products, as a tweetstorm will not resolve the matter.

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