CRYPTO: Do SEC claims against Coinbase ‘crypto-lending’ product hold water

Do SEC claims against Coinbase ‘crypto-lending’ product hold water

The United States Securities Exchange Commission (SEC), served Coinbase with what is known as a “Wells Notice,” for its “Lend” program. Due to this, “Lend” is now off the market “indefinitely.” In a recent blogpost, Coinbase CLO Paul Grewal expressed surprise at the notice, stating,

“The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion.”

As per the SEC regulations, “security” includes an “investment contract.” Though more clarity is needed on how Coinbase fits the bill, there are certain hints in its official offering. “Lend” offered a 4% interest or annual percentage yield for lending USDC stablecoin to borrowers. Amy Lynch, a former SEC regulator and president of FrontLine Compliance, explained,

“When does a crypto asset become a security? When you start lending it out.”

It is noteworthy that a lending contract is being looked at as securitization of an asset by some experts. Even if cryptocurrency is not considered a security in itself. In this context, the SEC website states that the “Howey test” applies to any “contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities.”  And, the regulator makes it clear that any securities product would require registration or exemption under the federal securities laws. 

Simplifying further, Crypto attorney Preston Byrne, partner a Anderson Kill stated,

” ‘Yield’ products are securities. They differ in no material respect from an unsecured bond. They just don’t use the name.”

In contrast, Grewal specified that the “Lend program doesn’t qualify as a security.” On the back of diverse views, SEC chief Gary Gensler has been calling for tighter crypto regulations lately. And, the new regulatory crackdown may set precedent for the industry which suffers from an unclear framework. Not so long ago, BlockFi was also underwater in three U.S. states for violating state securities law. It offered a similar interest-bearing product as Coinbase.

Therefore, when exchanges argue against categorization as securities, it creates another problem. Coinbase promoted “Lend” as high-yield savings accounts that offer more than the national average. However, it later clarified that “Coinbase is not a bank” and loaned crypto is not protected by the federal agencies.

It only further complicates the case for Coinbase if the Federal Reserve decides to get involved to enforce banking regulations. However, proponents want regulations that give breathing space to innovation in the US.  

Bringing attention to a conflicting school of thought, Livni argued in the aforementioned podcast interview, that the “government is not just there to promote industries, but also there to protect consumers.” Further, she stated, 

“They are not just there for the advancement of innovation”

Shifting focus to a similar lending product, another Canadian exchange is reportedly in discussions with the Ontario Securities Commission around crypto lending. Earlier, it claimed to have strengthened its case by procuring the required securities’ trading license.

If the Canadian regulator looks at the offering as a security, the exchange might have an upper hand in this case. In the U.S., if the regulator is looking at crypto lending as an investment vehicle, further clarity is required from the SEC in the coming days.


This article was first written on yusmid.com


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