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Coinbase, the largest cryptocurrency exchange based in the US, has gone public with a regulatory fight over a plan to offer high-yield cryptocurrency loans that the Securities and Exchange Commission threatened to sue over if the exchange launched the product. The cryptocurrency loans industry is booming, with billions of dollars of value locked up in the crypto-equivalent of savings accounts that offer much higher yield than you might find at any bank, and in recent months regulators have started circling.
According to a blog post, Coinbase was planning its own entry into the field with Coinbase Lend, wherein customers could lend tokens to third parties via Coinbase and receive interest payments. Notably, the fine print states that Coinbase is not a bank and funds lent through the service would not be protected by FIDC or SIPC insurance, which insure funds held in US savings accounts and financial instruments like stocks, respectively. In other words, while Lend may offer higher returns than a typical savings account, it comes with more risk.According to Coinbase, the SEC suddenly put the brakes on Lend last week and threatened to sue the company if it went ahead with the planned launch. Coinbase claims that at an initial meeting with the SEC, regulators told the company that it considered Lend to involve a security, but didn't provide detailed reasoning. Coinbase went ahead and announced Lend publicly, but didn't set a launch date. The SEC then opened an investigation and demanded records from Coinbase, including a list of everyone on the Lend waitlist, which the company claims not to have handed over yet. Now that the regulator has threatened legal action if Lend launches, Coinbase says it has been offered the chance to provide a written defense of Lend to the regulator, but claims it can't do so without knowing the specifics of why the SEC believes Lend is a security. According to Coinbase, the most the SEC has said is that it believes Lend is a security under the Howey and Reves frameworks, two common legal tests to determine if something is a security. Whether Lend is a "security" or not is important because if it is, then Coinbase would be subject to a whole set of rules, processes, and registrations that may make such products unviable to offer to everyone in the US, or else risk offering unregulated (i.e. illegal) securities.
In a blog, Coinbase denied that Lend qualifies as a security, saying, "customers won’t be 'investing' in the program, but rather lending the [USD Coin] they hold on Coinbase’s platform in connection with their existing relationship," and that Coinbase would "have an obligation to pay this interest regardless of Coinbase’s broader business activities."In a series of tweets on Tuesday night, Coinbase CEO Brian Armstrong expressed frustration and confusion as to the SEC's reasoning. "Ostensibly the SEC's goal is to protect investors and create fair markets. So who are they protecting here and where is the harm? People seem pretty happy to be earning yield on these various products, across lots of other crypto companies," Armstrong wrote. "Shutting these down would arguably be harming consumers more than protecting them, and by preventing Coinbase from launching the same thing that other companies already have live, they're creating an unfair market," he added. Perhaps Armstrong shouldn't be so surprised. In July, regulators in three states accused BlockFi, a massive player in the crypto-loans industry, of offering an unregulated security with its flagship product, the BlockFi Interest Account. “The notice of pending enforcement against BlockFi will be interpreted by other companies offering similar products as a warning shot. They are likely conferring with their counsel, assessing the risk that their offerings will also be found noncompliant and making decisions about whether to discontinue those offerings," cryptocurrency lawyer Preston Byrne told Motherboard at the time. Coinbase said it will not launch Lend "until at least October."