SEC plans to sue Coinbase over lending product but fails to provide explanation

• Coinbase received a Wells notice that the SEC would be suing the exchange over its interest product.
• The SEC did not provide clarity over its intention to pursue legal action against the Nasdaq-listed company.
• The launch of the Lend program would most likely be delayed until October.

Coinbase has just revealed that the United States Securities & Exchange Commission (SEC) is taking legal action against the firm’s Lend program. A Wells notice was sent out to the crypto exchange notifying it that the agency will sue the company in court.

Coinbase urges SEC to provide clarity

An announcement put forward by Coinbase stated that despite the exchange proactively engaging with the SEC over the past six months, the regulator is suing the company in court without revealing to the firm the grounds behind the legal action.

The SEC is targeting Coinbase’s Lend program, which allows the exchange’s users to earn interest on various crypto assets on the platform, starting with a 4% annual percentage yield on USD Coin (USDC). 

The exchange stated that the firm could have launched the product prior to reaching out to the SEC, but the company decided not to. Coinbase further highlighted that other cryptocurrency businesses have had lending products in the market for a number of years. Still, the Nasdaq-listed firm believes in having an “open and substantive dialogue” with regulators.

Coinbase believes the Lend program does not qualify as a security as it is not an investment contract or note. Customers who lend their USDC are holding it on the exchange platform, and the firm would have an obligation to pay the interest. 

While Coinbase has had meetings with the SEC, the firm added that they did not receive much of a response from the agency. The regulator suggested that they consider Lend to involve securities but did not mention the details behind the reasoning. The leading crypto exchange then decided to continue discussions with the financial watchdog.

Coinbase CEO Brian Armstrong suggested that the agency is “engaging in intimidation tactics behind closed doors.” He further cited SEC chair Gary Gensler’s statement that the regulator needs to provide guidance and clarity. Armstrong urged the watchdog to publish its position in writing and to enforce it evenly across the industry.

In addition, Armstrong said that shutting it down could be harming consumers more than protecting them by preventing Coinbase from launching the same products that already exist in the crypto industry.

In June, Coinbase announced the Lend program to the public but did not reveal a launch date in light of the regulatory environment. The SEC then opened a formal investigation, asking the exchange for documents and written responses that were then handed over to the agency. 

Lend has not been publicly launched so far, although the SEC still has not explained the issue behind the reasoning that it could involve an investment contract. The agency has refused to share their views but only referred to the Howey and Reves cases from over three decades ago. 

Coinbase further added that it would not be launching Lend until October this year and will keep its customers informed.