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SEC Threatened Lawsuit Over Coinbase’s Lend: Why Now?

Raymond’s take: The U.S. Securities and Exchange Commission threatened to sue Coinbase if it released its yield product called Lend.

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Raymond Hsu

CEO of Cabital

Raymond’s 10 years of experience holding leadership positions in fintech companies and banks inspired him to democratise digital currency financial solutions with Cabital.

Coinbase has been long planning to launch a new product called Lend.

The Delaware-based cryptocurrency exchange would take user’s cryptocurrency deposits and lend them out to borrowers, collateralizing their loans with other cryptocurrencies such as Bitcoin and Ethereum. Depositors would earn interest on their holdings from the loans.

But there is one big problem. Coinbase shared that the U.S. Securities and Exchange Commission (SEC) had issued a Wells notice, an intent to sue the company, if it launched the yield product. The SEC told Coinbase earlier this year that it thought that the Lend product was a security, but according to Coinbase, they “wouldn’t say why or how they’d reached that conclusion.”

The question for the SEC is around whether the lending product is an “investment contract,” making it a security under federal law. This will come back to the ruling in Securities and Exchange Commission v. W. J. Howey Co, which was a Supreme Court Case of the United States that resulted in the Howey Test. 

The Howey Test can be used to determine whether an instrument qualifies as a “investment contract” for the purposes of the Securities Act: “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."

Coinbase thinks the SEC is in the wrong regarding this matter, and the management has not been shy to let the public know where it stands on the issue. 

Coinbase’s Chief Legal Officer Paul Grewal published a blog called “The SEC has told us it wants to sue us over Lend. don’t know why?” And CEO Brian Armstrong let it rip on Twitter in a series of tweets and wrote, “They refuse to tell us why they think it's a security, and instead subpoena a bunch of records from us (we comply), demand testimony from our employees (we comply), and then tell us they will be suing us if we proceed to launch, with zero explanation as to why.”

I wonder why the SEC would plan on suing Coinbase now? Why did the regulator choose this exact moment? From everything I have seen, Coinbase has gone out of its way to reach out to regulators to work together on building out clear and definable regulations for the growing cryptocurrency industry in the U.S. From my perspective, Coinbase has always done its best to be as transparent and compliant in their dealings with regulators.

I find it curious that all the other regulators were interested in speaking with Coinbase, but the SEC was the only one who refused to have an ongoing conversation with them, making it hard for the firm to figure out what they can and cannot do. Open communication and dialogue are at the heart of good regulation.

There are also other digital asset companies that have a similar cryptocurrency lending platform for years who haven’t been sued by the SEC.

The whole issue begs the question: why is the SEC going out for blood here? Why does a compliant-driven firm like Coinbase get punished while other crypto-lenders get a pass? Why did Ripple get sued and why was Ethereum blessed? 

This case could completely alter the future of cryptocurrencies. Let’s hope that the SEC makes the right decision, as it could either stifle innovation in the rapidly growing decentralized finance space or unleash a new wave of creativity - creating thousands of new jobs and brilliant technologies. 

Edited by: Baron Laudermilk

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